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Issues The Brokerage Industry Faces Essay

1880 words - 8 pages

Issues the Brokerage Industry Faces

"What regulatory issues does the brokerage industry face with respect to the retail investor and the advent of online securities trading?"


The number of securities trades conducted online has taken a dramatic increase in recent years, rising from under 100,000 trades per day in 1996 to over half a million in 19991. The SEC (Securities and Exchange Commission) expects the level of online brokerage assets to rise to $3 trillion dollars by the year 2003, from a meager $415 billion in 19981. The appeal is that the Internet provides "real time" stock quotes, previously available only to brokers and their firms, in addition to a wealth of information on just about every company that is publicly traded. A new breed of investment firm has been born, conducting its business solely on the World Wide Web, and the average fee charged by one of these companies is now only $15.75 per trade , a fraction of the cost at a full-service firm. Online trading has given rise to a greater frequency of trades as well. While online traders only currently represent about 10 percent of the market, they tend to trade two to three times as often, making up approximately 30 percent of all trades, up from 17 percent in 1997 . Many people have given up their jobs to become full time traders, with mixed success. In fact almost all day traders lose money, and the recent market turmoil has left many gasping for breath. In its new form as the "Online" brokerage firm, the business is still flourishing. Despite being forced to lower their commissions and advertise more to attract new business, they are managing to adapt. DLJ Direct, for example, has posted an 82 percent increase in revenues from 1998 to 1999 , and as of July 1, 1999, online transactions accounted for 52 percent of all trades at broker Charles Schwab . With the general trend of the market moving towards computerized trading, the brokerage industry is being forced to evolve as well.

Statement of the Issue

Due to the high volume of trades conducted via the World Wide Web, several problems have been encountered regarding both the application of current trading laws to cyberspace and the integrity of internet users with regard to the brokerage industry. The Securities and Exchange Commission has recently published a report concerning on-line brokerage, which attempts to determine what the place of the brokerage firm will be in this Internet scenario, and what measures can be taken to regulate the transactions conducted on the world wide web. Many of the problems encountered with the advent of the Internet are analogous to those in conventional trading, and are addressed by existing laws and regulations. However, the Internet also presents unique situations that will require new methods of surveillance and enforcement by the regulators. First, there is the issue of computer systems: how to ensure that a firm's system has enough capacity...

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