The Digital Trading Floor
From crispyneurons
An introduction to online brokerage firms... by Jason Wells
April 1998
Much has been made of the limitless promise of electronic commerce. Many companies mistakenly believed that it would completely change their marketplace. Netscape incorrectly identified it as the first killer application of the Web. In reality, progress in e-commerce has been slower than many had hoped, because of the massive infrastructure changes that it necessitated. In one area of e-commerce, however, progress has been swift: online stock trading.
Online stock trading is more than just the digital equivalent of a regular broker. These firms are distinguished from their brick-and-mortar rivals in three ways. First, they all offer the ability to enter a trade order at any time and from any computer connected to the Internet, 24 hours a day. Secondly, many online firms offer real-time financial information that takes longer to get through traditional means. Finally, the trading fees are often significantly lower. Sound interesting yet?
[edit] The Online Brokers
Investors may now choose from a surprisingly diverse collection of online brokerages. Even compared to just a year ago, the number of e-brokers as mushroomed, and the competition has been intense. The chart below lists a few of the online players, along with their advertised equity trade fees.
| Company | Min. Balance | Trade Fee |
| AccuTrade | None | $28.00 + $0.02/share |
| American Express | None | $26.95 |
| AmeriTrade | $2,000 | $8.00 |
| Datek | $2,000 | $9.99* |
| eBroker | $10,000 | $12.00 |
| e.Schwab | $5,000 | $29.95** |
| E*Trade | $1,000 | $15.95* NYSE, Amex $19.95 Nasdaq |
| Fidelity WebXpress | Unknown | $19.95** |
| TD Waterhouse | $5,000 | $12.00* |
| * 5000 shares or fewer. | ||
| ** 1000 shares or fewer. | ||
Which one is best? No one knows. After all, they clearly cater to different types of customers, and what's good for one trader may be bad for another. Still, I hope this chart may help you make an intelligent decision if you are looking to open an account with an e-broker. I am most familiar with E*Trade, so that's the e-broker I'll be discussing.
The three big issues regarding e-brokers are trade fees, security, and reliability. The various fee structures, laid out below, are pretty easy to understand, so we'll move right into the subject of security.
[edit] Security
One of the first concerns that comes to mind when buying or selling stocks over the Internet is safety. That is, will other people be able to log in and use my account as their own? Will my money be stolen by hackers and online bandits?
Everyone has an opinion on this subject, many of which conflict. All of the e-brokerages with which I'm familiar use Secure Socket Layer (SSL) to encrypt information sent between their Web servers and your browser. SSL has the reputation of "better than clear text, but susceptible to hacking." A determined and knowledgeable hacker can break through SSL encryption. This risk always exists.
At the same time, a phone phreak might be listening in on your conversation when you call a human broker. At least on the Internet, I can encrypt the transmission. Since the Internet (with SSL) is more secure than a telephone line, I can live with the risk of hacking.
[edit] Reliability
The reliability of online trading services was recently put to the test.
Last October, a stock market crash in Hong Kong initiated a global market correction. The Dow Jones Industrial Average suffered the biggest point drop in its history. Then, a few days later, on October 28, the market shot back up. These wide price changes, occurring as they did in such a brief period of time, made themselves felt in the volume of shares (which was in excess of one billion shares, a new record) that the online brokerages processed.
Several prominent e-brokers -- ones that had loudly proclaimed their fast, efficient service -- had problems processing this enormous load of trading. E*Trade in particular had problems. A TechWeb News article published a few months back discusses the details of E*Trade's reliability problems. Customers were outraged. People started to ask, Are e-brokers really better after all?
This question has no easy answer. Now that we've learned that reliability is a question, we have to consider it when deciding which broker to use. My personal experience with E*Trade is that my orders get processed in a timely manner. Then again, I wasn't trading on October 28. Caveat emptor.
[edit] The Bottom Line
Though I'm satisfied with E*Trade, I don't pretend that it's perfect.
For example, it should have better analytics. In other words, it should be possible to find companies whose stock meets specific criteria that you define. There should be better research resources. Although it has some stock charting tools and some statistics, it could use more strength here. It would be nice if its reliability were improved. It would be nice if it lowered its fees. All in all, however, it's not bad.
I think the same thing can be said for many of the e-brokers.
For those of you who feel comfortable using the Internet, online stock trading can be very nice and has several big advantages over the brick-and-mortar brokers. Still, be conscious of the security and reliability of your chosen e-broker, and don't get into it unless you feel comfortable.
[edit] More Information
The Internet is chock full of investor goodies. Here are just a few sites you may want to check out:
- Wired Digitrading is an interesting and revealing collection of articles about the e-broker industry.
- The Motley Fool is one of the most popular stock advice sites on the Web.
- Quote.com offers streaming real-time charts over the Internet.
Jason Wells wants to get rich rich rich in the dot com boom!
