ON LINE TRADING OF SECURITIES IS BECOMING MORE AND MORE POPULAR. ARE WE WITNESSING THE SLOW DEATH OF THE TRADITIONAL INVESTMENT ADVISORS?
TABLE OF CONTENTS
1.0 1.1 1.2 1.3 1.4 1.5 2.0 2.1 2.2 2.3 3.0 3.1 3.2 3.3 4.0 4.1 4.2 4.3 5.0 6.0 Introduction ………………………………………………………………………………………………………… 1 Defining securities……………………………………………………………………………………………… 2 Common types of securities ………………………………………………………………………………… 2 Securities Trading ……………………………………………………………………………………………… 3 Components of Securities Trading ………………………………………………………………………..
The Term Paper on Consumer Securities Trading Full Service
... is manifested in nearly every aspect of the securities trading market today. Trading volume increase is one of the largest ... and possible implications for the future of consumer securities trading in the United States. Traditional brokerages have been ... their portfolios with the broker. The prevailing model for securities trading was still professionally managed, although different levels of ...
3 Examples of Exchange Markets …………………………………………………………………………… 4 Traditional Investment advisors…………………………………………………………………………… 6 Where do traditional investment advisors operate? ………………………………………………… 6 Advantages of traditional investment advisors ………………………………………………………. 6 Disadvantages of traditional investment advisors …………………………………………………… 7 online trading of Securities ………………………………………………………………………………… 8 What is a Board Lot? …………………………………………………………………………………………..
8 Some examples of Online Trading of Securities …………………………………………………….. 8 Requirements and a brief description on how to trade online …………………………………… 9 The emergence of Online Trading of Securities …………………………………………………… 10 Trends that have been found through Past Research……………………………………………… 13 Advantages of Online Trading …………………………………………………………………………… 16 Disadvantages of Online Trading……………………………………………………………………….. 17 Is it really the slow death of the Traditional Investment Advisors? ……………………… 19 References …………………………………………………………………………………………………………. 21
The Business plan on Traditional Investment Appraisal Techniques
Introduction “If you can’t measure it, you can’t manage it”. This basic principle of Peter Drucker is nowadays especially important when it comes to the valuation and management of strategic investments, which have the potential to bring sustainable change to the business processes of a company. When it comes to the process of assessing strategic investment proposals through investment ...
Are we witnessing the slow death of the Traditional Investment Advisors?
1.0 INTRODUCTION
Generally speaking, since the twenty-first century, changes in technology have significantly changed the way of doing business. As such, the facet of carrying out the trading of securities has equally experienced considerable changes especially due to globalisation. Thousands of investors be it individual, retail or institutional shareholders trade with shares and equities on a daily basis. However, in the late 1990‘s, the traditional investment has become increasingly less popular. Traditionally, stock exchanges operated as an open out-cry system, whereby brokers directly received customer orders and then proceeded to buy or sell the shares. Face to face meetings were also common between them. Later on, the emergence of phones and fax machines followed by the internet has steadily weakened the role of the broker. This is mainly because, the services offered by the internet and the pace at which transactions are executed have made online trading widely pleasant and common around the world. With online trading, investors are free to manage their own portfolio rather than seeking the services of a broker or planner every time they want to make a trade. However, the middleman, that is, the investment advisor absolutely finds it more difficult to offer his services in such situations, where technology is gradually replacing his functions. As such, this assignment seeks to: 1. Provide an overview on the various characteristics associated with online and traditional ways of investing. 2. Analyse the extent to which online investment could overcome traditional investment. 3. Identify ways in which traditional investors can still provide their valuable services while adapting to the challenges of technology.
The Essay on Securities & Exchange Board Of Indi
... with marketing of securities and investment of stock exchange, merchant banking, port folio management, stock brokers and others in India. The Securities and Exchange Board of India ... Capital Funds & Collective Investment Schemes. 3. Prohibiting fraudulent and unfair trade practices and insider trading in the securities market. 4. Investor education and ...
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Are we witnessing the slow death of the Traditional Investment Advisors? 1.1 DEFINING SECURITIES
Securities are tradable claims on the assets of an institution or individual. Securities are financial assets that merely represent claims on real assets. Securities represent ownership (shares of stock) or creditorship (bond) of an institution (corporation).
Most corporate securities imply either fixed claims (such as bonds that typically involve fixed interest and principal repayments) or residual claims (such as common stock, whose owners receive assets remaining after creditors’ and other claims have been satisfied).
Most securities are marketable to the general public, meaning that they can be sold or assigned to other investors in the open marketplace. 1.2 i. SOME COMMON TYPES OF SECURITIES Debt securities
Debt securities denote creditorship of an individual, firm or other institution. They typically involve payments of a fixed series of interest or amounts towards principal along with principal repayment. For instance, Bonds: Long term debt securities issued by corporations, governments or other institutions. Treasury securities: Debt securities issued by the Treasury of the United States federal government.
ii.
Equity securities (stock):
Equity securities denote ownership in a business or corporation. They typically permit for dividend payments if the firm’s debt obligations have been satisfied. The two primary types of marketable equity issued by corporations are: Common stock: Security held by the residual claimant or owner of the firm, and Preferred stock: Stock which is given priority over common stock in the payment of dividends and liquidation; preferred stock holders must receive their dividends if common stock holders are to be paid dividends.
The Essay on Stock Exchange Market Shares Buy Stockbroker
A stock exchange is a place where you can buy and sell shares. We call people who buy or sell small numbers of shares small investors. Organizations, who buy or sell large numbers of shares, are institutional investors. A stock exchange is the place where companies can raise money to expand their businesses. Companies raise this money by selling shares to investors. At the same time the stock ...
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Are we witnessing the slow death of the Traditional Investment Advisors? iii. Derivative securities
Derivative securities concern payoff functions derived from the values of other securities, rates or indices. 1.3 SECURITIES TRADING
Trading occurs in securities markets, physical or virtual, where traders communicate with one another and execute transactions. The basic function of a market is to bring together buyers and sellers. Most markets also provide information in the price discovery process, and the information revealed in this process is a function of the structure of the market. 1.4 COMPONENTS OF SECURITIES TRADING
The first component of a trade involves the acquisition of information and quotes. Quality information and transparency are crucial to price discovery. The second component of the trade is the routing of the trade order. Routing involves selecting the broker to handle the trade, deciding which market will execute the trade and transmitting the trade to the market. The third component of the trade is its execution, when the security is actually bought or sold. Buys are matched and executed against sells according to the rules of that market. Rules might provide for electronic execution, telephone execution or direct human (face-toface) execution.
Finally, the fourth component of the trade is its confirmation, clearance and settlement. Clearance is the recording and comparison of the trade records and settlement involves the actual delivery of the security and its payment.
Trade allocation might also be a part of this final process, as large institutional orders involving many clients and many transactions are allocated to various clients.
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Are we witnessing the slow death of the Traditional Investment Advisors? 1.5 EXAMPLES OF EXCHANGE MARKETS
NYSE Euronext The NYSE Euronext was launched on April 4, 2007 as a result of a merger between the New York Stock Exchange Group and Euronext, NV. It is the world‘s largest exchange and the first global exchange, featuring more than 8000 listed issues it includes 90% of the Dow Jones Industrial Average and 82% of the S&P 500 stock market indexes volume. The NASDAQ OMX Group
The NASDAQ OMX Group is a U.S. based financial services company which is best known for being the owner of the NASDAQ stock market. It is currently one of the the largest and most actively traded electronic stock market in the U.S. with a daily share trading volume of over 2 billion for 3,200 listed companies London stock exchange
The Essay on Insider Trading Stock Information Market
... The SEC also regulates stock exchanges, brokers, and dealers in securities, and also sets the margins for bank credit in security trading. So basically the ... Trading" is. Insider trading has to do with stocks, on the stock market. The stock market is basically an organized place where stocks and bonds are traded. ...
The London stock exchange was founded in 1801. It is the most international of all the world‘s stock exchanges, with around 3,000 companies from over 70 countries admitted to trading on its markets. Tokyo Stock Exchange
The Tokyo Stock Exchange has around 2,300 companies which are separated into the First Section for large companies, the Second Section for mid-sized companies, and the Mothers section for high growth startup companies. Shanghai Stock Exchange
The Shanghai Stock Exchange is not entirely open to foreign investors. The main reason is tight capital account controls by Chinese authorities. The securities listed at the Shanghai Stock Exchange include the three main categories of stocks, bonds, and funds. Bonds traded on SSE include treasury bonds, corporate bonds, and convertible corporate bonds. Hong Kong Stock Exchange
The Hong Kong Stock Exchange (SEHK) has about 1,477 listed companies and it operates securities market and a derivatives market in Hong Kong and the clearing houses for those markets. 4
Are we witnessing the slow death of the Traditional Investment Advisors? Toronto Stock Exchange
It is the largest stock exchange in Canada and the third largest in North America. Toronto Stock Exchange is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities. The exchange lists conventional securities, exchange-traded funds, split share corporations, income trusts and investment funds. BM&F Bovespa
Founded in 1890, today BM&F Bovespa is the largest stock exchange in South America and 8th largest in the world by market capitalization. It is the most important Brazilian institution to intermediate equity market transactions and the only securities, commodities and futures exchange in Brazil. There are about 381 listed companies at Bovespa. Australian Securities Exchange
The Australian Securities Exchange is Australia‘s primary securities exchange and it was created back in 2006 when the merger of Australian Stock Exchange and the Sydney Futures Exchange took place. Today Australian Securities Exchange is 9th largest stock exchange in the world by market capitalization and has an average daily turnover of 4,685 billion dollar. Deutsche Börse
The Essay on Insider Trading Stock Information Securities
The Stock Market is an organized market for the trading of stocks and bonds. In Europe a stock exchange is often called a bourse. Stock exchanges exist in all-important financial centers of the world. Members of an exchange buy and sell for themselves or for others, charging commissions. A stock may be traded only if it is listed on an exchange after having met certain requirements. The New York ...
Deutsche Börse is one of the world‘s leading exchange organisations providing investors, financial institutions and companies access to global capital markets. The exchange covers the entire process chain from securities and derivatives trading, clearing, settlement and custody, through to market data and the development and operation of electronic trading system. Deutsche Börse has an approximately 765 listed companies with a combined market capitalization of 1,185 trillion USD.
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Are we witnessing the slow death of the Traditional Investment Advisors? 2.0
TRADITIONAL INVESTMENT ADVISORS
An investment adviser is an individual or a firm that is in the business of giving advice about securities to clients. The Investment Advisors Act of 1940 defines an ‗investment advisor‘ as any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications. Common examples of such traditional investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations. Investment advisors are helpful in negotiating complicated transactions because of their broad background in many aspects of securities, including deal structuring, project finance, and brokerage. 2.1 WHERE DO TRADITIONAL INVESTMENT ADVISORS OPERATE?
Normally, traditional investment advisors operate in a traditional brokerage house often called the trading floor. The trading floor is the active trading area of a stock exchange. Most trading of stocks happens on a stock exchange. These are special markets where buyers and sellers are brought together to buy and sell stocks. The best known stock exchanges are the New York Stock Exchange and the American Stock Exchange. 2.2 ADVANTAGES OF TRADITIONAL INVESTMENT ADVISORS Better knowledge of the market
Online brokerages are not equipped to handle advanced planning needs such as advanced estate, tax, and insurance planning issues and hence traditional advisors offer these specialised services at competitive rates with the added benefit of personal relationship and face to face interaction. Traditional brokers have deeper and detailed knowledge and experience of the market in specific areas unlike online advisors. Guidance
Traditional advisors can offer guidance and advice to clients, and they often get to know their clients very well over time. People who feel that such interaction is beneficial tend to prefer to work with traditional brokerages in order to maintain this relationship. While online brokers have
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Are we witnessing the slow death of the Traditional Investment Advisors? frequently asked question sections and online help features, they can’t match the interactive element of establishing a relationship with a broker with whom they can trust and learn from. Security
There is face-to-face contact between the advisor and the investor and consequently personalised information is obtained. While with online trading, the Internet may increase the opportunities for fraud to occur or blur the distinction between impersonal and personal advice, thus giving an investor a false sense of security. 2.3 DISADVANTAGES OF TRADITIONAL INVESTMENT ADVISORS
High charges
A broker charges more than an online broker. The traditional advisor will help to decide where an investor should invest his/her money and will recommend certain investments over others. Therefore, the broker is not bound by law to act in the best interest of the client and only has to advice the client, thus indulging in unethical actions. On the other side, online brokerages are easy to use and to do business more quickly at a cheaper rate. Time Consuming
Investors who would like to manage their own portfolio prefer to trade online rather than going through a broker or planner every time they want to make a trade. Through the internet, investors can just sign up and start trading in one hour. Traditional investment is time consuming and that is why investors are shifting to online trading services.
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Are we witnessing the slow death of the Traditional Investment Advisors?
3.0 ONLINE TRADING OF SECURITIES
Online trading of securities is an activity that has increased considerably in the late 90‘s with the introduction of affordable high speed computers and internet connections. This is whereby buy/sell orders are placed for financial securities and/or currencies with the use of internet based proprietary trading platforms. Nowadays, stocks, bonds, options, futures and currencies can all be traded online. E-trading of securities offers the ability to an investor to make his own decisions and be completely responsible for the transactions he is dealing in. Since the late 90‘s, we have been seeing the constant increase in the use of internet facilities to trade online. Thus, we can say that on-the-floor trading is being gradually substituted while the most novice investor can be transformed into an active and powerful one. One reason behind this substitution is that commissions are at a discount compared to the cost having a traditional broker to manage our asset or portfolio. Put in simple words online trading of securities results in more gains. Moreover, an investor can trade as little or as much as he/she wants and as rarely or as frequently as he/she wants. Compared to traditional investment advisors‘ policy, if the investor trades shares of a stock that is less than the board lot, he would usually have to pay more in brokerage commissions since it is harder to find a buyer of shares less than board lot. 3.1 WHAT IS A BOARD LOT?
It is standardized number of shares defined by a stock exchange as a trading unit. In most cases, this means 100 shares. The purpose of a board lot is to avoid “odd lots” and to facilitate easier trading. It’s more difficult for a broker to find a buyer for, say, 17 shares, than if everybody agrees to trade in 100 share lots. 3.2 SOME EXAMPLES OF ONLINE TRADING OF SECURITIES Merrill Lynch (America)
Merrill Lynch is among the most sought after companies when it comes to online trading. With an online trading pool and hundreds of offices worldwide, Merrill Lynch charges $29.95 for standard trades which enhances careful stock choices and also includes online advice from experienced stock brokers.
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Are we witnessing the slow death of the Traditional Investment Advisors? Charles Schwab U.S
It is an online trading company that received the award for the highest customer satisfaction from J.D. Power and Associates in 2009. E-Trade from New York (Headquartered)
E-Trade is a well-known company offering online trading which is among the first brokers to offer international stock exchange trading. Highly reputed when it comes to online trading, ETrade offers a strong trading platform to its active traders. It handles approximately 283,000 transactions daily. OptionsXpress headquartered in Chicago
OptionsXpress is famous for its flexibility. It can be beneficial for both the actual investor and the virtual one. OptionsXpress also offers a virtual trading world in addition to the real world one, to allow investors a chance to get their feet wet without the risks, and rewards, of actual trading. 3.3 REQUIREMENTS AND A BRIEF DESCRIPTION ON HOW TO TRADE ONLINE
The most important things required here are a computer and an internet connection. Then comes choosing a platform and register for an account. The requirements for registration are not always the same; this depends on the platform we choose to register on. Registration, normally, can be done online. Some systems are very straight forward whereas others may be quite complicated and time consuming. Government policies may dictate these differences in registration. Steps involved are as follows: 1. Open an account with the brokerage service you choose for the minimum amount necessary to trade. 2. Ensuring sufficiency of capital in easily available funds, depending on specific requirements of the country to which online- trading is taking place. 3. Set limits to the trading activity, such as number of trades and/or dollar amount of commission, for an initial three-month period.
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Are we witnessing the slow death of the Traditional Investment Advisors? 4. Research at least three online brokerage services and read all of the ‘terms and conditions’ statements concerning trading accounts. 5. Write down all of your trading (buys and sells) immediately after execution: date, time and price per share of the actual purchase; quantity; all security or position identification. Use these records for tax preparation and save them in case you are audited. 6. Evaluate your performance at the end of the three months. What were your gains and losses? Did you stick to your goals?
4.0 THE EMERGENCE OF ONLINE TRADING OF SECURITIES
Nowadays, people are seen to take the roles of financial planners and possess the required ability to invest in the security market. The prevalence of online trading companies has been instrumental in breaking the barriers between the super wealthy being the only ones that could afford to regularly trade in the market and the average man who now has the power to make the same trades for less than half the commissions that once would have been essential for the same amount of work on the part of broker. Also, the rise of electronic trading amongst hedge funds is being driven by a fraternity of mathematicians, physicists, and computer scientists who are designing better ways to develop algorithms that crank out buy and sell orders at extraordinary speed. The online trading industry is one of the many industries that is constantly growing at considerable speed and has become one of the most popular ways for people to invest in the stock market. Investors prefer to invest online as this provides quicker access to their online account and portfolio, and trading of stocks can be carried out whenever they want. Moreover, there is customer service that is available to the investors. Many studies of financial trades draw attention to three aspects namely: the growth in the volume of trades, increasing complexity of trading decision and thereby greater reliance on electronic trading. A recent study by IBM notes: “worldwide investible assets are expected to double to nearly $300 trillion by 2015 – nearly double the growth rate of worldwide GDP “. IBM expects that machines will execute a growing share of these trades. “One likely result is that for 10
Are we witnessing the slow death of the Traditional Investment Advisors? every forty traders there are today, there will be only four left standing for a given product group by the year 2015.‖ Those who trade on a computerized system have easier access to fundamental information and prices on other markets. Pirron(1996).
Pirrong (1996) compares theoretically and empirically the liquidity of German Bund Futures contracts traded simultaneously on the open-outcry platform LIFFE and electronically on Deutsche Terminboerse DTB. He finds that the computerized system offers lower spreads and is more liquid and deeper than the floor system. Trading Companies across the world are going to increasingly rely on high performance, execution management systems, and algorithms for processing large amounts of data in a small period of time, and reacting appropriately in a sub-second timeframe, thereby leaving manual traders far behind. However, companies will need to invest on technology particularly on the buy-side of securities trading in order to enhance profitability. Faster servers for calculating models and faster connectivity to the markets will enable trading companies to withstand the significant increase in trading volumes. Online trading is fast becoming the rule in most countries. For instance, in India, electronic trading has enhanced transparency and liquidity in the market. Also, debt transactions conducted electronically in India accounted nearly 80% in 2009. In relations to Canada, James Duncan, Senior Vice President and Director International Trading, Canaccord Capital and Past Chairman Securities Traders Association stated that: ―As a head trader, my job has gone from supervising large numbers of people to monitoring a growing number of machines and fewer people. Electronic trading has made it possible to handle 10 times more order flow with 60% fewer traders than five years ago. A trader‘s job is moving from working trades to supervising systems. It is imperative that traders know how systems perform. ‖ What have driven the introduction of electronic trading in Canada are the declining commissions. As electronic trading grows, clients demand even lower rates. Commissions have come to a point where they are sometimes less than exchange fees. If we have a look at USA, we can see that the trend shows fixed income market has undergone dramatic changes over the past few years and has become increasingly electronic. Celent, a Boston research firm noted in one of its report that electronic fixed income trading grew at a 11
Are we witnessing the slow death of the Traditional Investment Advisors? compound annual growth rate of 17% from 2003 to 2007. According to Celent, U.S. treasury and mortgage-based securities are the segments that have seen the biggest growth in electronic trading, while the notoriously illiquid U.S. corporate bonds are less likely to be traded electronically. Meanwhile, the development of fixed income electronic platforms has led to a big change in market structure and a diversification of product offerings. African countries also have witnessed the appearance of automated trading. Uganda, Tanzania and Kenya are in the process of constructing a computerized system that will allow electronic trading of shares and bonds. Already, the automated trading system has been installed in the Nairobi Stock Exchange (NSE) and it is expected that more African countries will follow course. This system will ease the listing of cross border initial public offers (IPO‘s) and mass cross listing and enable stock market regulators to monitor trading electronically. As East Africa embraces electronic trading, the traditional world of securities trading is unlikely to be the same again. Mauritius has also experienced the effects of online trading through the stock exchange of Mauritius (SEM).
Over the years, SEM has witnessed a significant overhaul of its operational, regulatory and technical framework to reflect the ever-changing standards of the stock market environment worldwide. SEM is today one of the leading Exchanges in Africa and a member of the World Federation of Exchanges (WFE).
SEM’s Automated Trading System (SEMATS) was launched on 29th June 2001. Built on third generation technology, SEMATS brought an end to traditional trading patterns which were very much present since the initiation of the SEM. Communication lines link intermediate dealers to the SEM trading engine. Recently, a close cooperation has been noted between SEM and the central bank in order to set up a platform to trade medium and long-term government securities on the Exchange. Therefore, the arrival of technology and automated trading has enormously contributed in re-shaping the trading of securities on the Mauritian stock market. Online trading of securities is quite similar to traditional trading of securities in the form that both include a broker that provides brokerage information. The only difference is that in traditional trading there is face-to-face contact with the broker who provides guidance and demands a commission in return while on the other hand an online broker can be overlooked. 12
Are we witnessing the slow death of the Traditional Investment Advisors? Online brokerages are so easy to use that even internet and investing novices can sign up, log on and start trading in less than an hour. This is very tempting to investors who would like to manage their own portfolio rather than going through a broker or planner consistently whenever, they want to make a trade. Moreover, the internet is maturing rapidly. During the 80’s and 90’s the internet was transformed from a novel way to communicate and do business to the most powerful information sharing tool that the world has ever seen. As a result, there is more high-quality and inexpensive investing information available to the average investor than ever before. Investing research sites have also made huge steps over the last ten years. Newly investors that have internet knowledge can quickly learn to use investing research and analysis tools that are just as powerful as any used by investing professionals. Thus, online trading of securities favors active traders, who want to make quick and frequent trades and hence provides many advantages to traders.
4.1 TRENDS THAT HAVE BEEN FOUND THROUGH PAST RESEARCH
Research shows that in the year 2000, there was no Internet trading in Taiwan securities market. Under the regulations, if an individual wants to trade securities by internet, he can only key in his order, through internet, into his broker house, his broker then print out that order, make a stamp, and key that order again into his computer networks with the securities exchanges. The regulations still prohibited an individual‘s network connects directly with the exchanges. In additions, virtual broker was not allowed under the regulations of Securities and Futures Commissions. It was also noted that 74 of total 223 brokerage firms in Taiwan providing Internet trading/retaining service. Trading value took up 3.78% in Taiwan Stock Exchange by the end of 1999. This ratio increased to 4.76% by mid- February of 2000. There are almost 1,200 trading floors around Taiwan Island to service investors. It has been very suitable for individuals to trade securities. Moreover, many individual investors tend to go to trading floor to feel the up and down atmosphere or someone is for social purpose. Investors are still not familiar with the cross boundary trading on foreign securities markets.
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Are we witnessing the slow death of the Traditional Investment Advisors? The chart below illustrates the projected rates of e-finance penetration worldwide. In 2005, the share of banking that is done online could rise from 8.5 percent to 50 percent in developed countries and from 1 percent to 10 percent in emerging markets. With better connectivity, online banking transactions in emerging markets could rise even further to percent by 2005 (Glaessner, Claessens, and Klingebiel, 2001).
Some estimate that $6.3 trillion of bank-to-bank transactions will be online by 2005. E-finance penetration: Projected rates for 2000, 2005 and 2010
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Are we witnessing the slow death of the Traditional Investment Advisors?
Source: Glaessner, T., Kellermann,T., & McNevin,V., (2002).
Electronic Security: Risk Mitigation in Financial Transactions Public Policy Issues, p.4. According to the World Bank‘s financial sector research, in 2005, in the world‘s securities markets, online brokerage were to grow by 80 percent in developed countries, and 40% in developing countries assuming that a better business and enabling environment is put in place. The trend observed in the capital markets of more developed countries, such as the United States, Western Europe and Singapore, is continued increase in the use of online trading by the year 2010. In emerging economies, South Korea represents the high end. Since e-brokering was launched in Korea in 1997, the proportion of its total trading value increasingly raised from 19 percent in 1999, 43 percent in 2003 to approximately 80% in 2010. In Russia, approximately 67 percent of stocks will be traded on the Moscow Interbank Currency Exchange (MICEX) by 2010 via the Internet.
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Are we witnessing the slow death of the Traditional Investment Advisors? 4.2 ADVANTAGES OF ONLINE TRADING
The disadvantages of traditional trading of securities can be the advantages of online trading of securities and the advantages of the former can be the disadvantages of the latter. Let us have a look at those. Flexibility and Cost
Investors have shifted from traditional to online trading of securities because as mentioned above, in online trading, they have the ability to be the master of their choices with a real freedom to decide what and when to trade. They have the liberty to decide things in their own way and accept their own responsibility for trades. Furthermore, as discussed above, the presence of traditional advisors makes traditional trading more costly as these advisors (brokers) offer their service by providing information and guidance for less risky investments and therefore, online trading is less costly as there is no advisor. Full Control
As we all know in traditional trading, it is the broker that manages the client‘s portfolio. So, if a broker finds a trade is a poor investment, he/she will refuse to invest. While this could save the potential client from making a bad investment, it could also prevent them from taking a risk that would pay off enormously. Online stock trading removes the middleman between traders and the stocks they want. Moreover, online trading provides more investment opportunities than the traditional broker and there is the possibility to move your stocks on a 24/7 basis. Immediacy
The third benefit of online stock trading is immediacy. Using the daisy chain of investor to broker to trade to payoff was sometimes too time consuming to execute the trade in time, which is a danger in the world of stocks where time is money and seconds count. Trading online allows immediate trading for the investor and real-time updates regarding a stock‘s performance. The lag between the investor’s purchase and the actual time the stocks are bought has been reduced to nil.
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Are we witnessing the slow death of the Traditional Investment Advisors? No Limitation to the Amount of Trade
Online Stock Trading gives the freedom to an investor to make as many or as few trades as he/she desires. Brokers normally use Board Lots so as to avoid ―odd‖ lots. A minimum trade allotment is required which meant that an individual could not make a single trade for a worthless sum. They were forced to adhere to the broker‘s guidelines. This prevented casual traders from being able to trade whatever volume of investments they wanted. 4.3 DISADVANTAGES OF ONLINE TRADING
Along with the above mentioned advantages, online trading has some disadvantages. These are as follows: Losses are highly probable
Online trading seems very interesting. However, it has its drawbacks. The biggest problem is that there are lots of traders who are trying to make money without having any previous experience in stock trading. Experienced investors have pointed out that 80% of new online stock traders make loss right at the beginning. The reasons behind this can be lack of understanding of the technical indicators and charts, newbies do not know how to develop a proper investment plan, no idea of how to build a good portfolio and no real anticipation of when to buy or sell stocks. And once these new investors are in trouble, they are unlikely to get out of it unless a real stroke of luck. There is also the problem of not knowing when to exit. The problem of having no exit plan when trading online is not concern for newcomers but experienced traders also get trapped into it. When price of stocks goes down, investors try to keep it to a maximum in hope that the price will rebound and in case of rising prices, they still keep it in hopes of getting even higher price rise. This is rather a psychological disadvantage, where traders are blinded with the view of achieving more and more profits and losing less and lesser capital. With traditional brokers, the problem did not really existed as they were provided with exit points by the customers, as to which lower or upper limit price target they should sell. The risk of Fraud
In traditional stock trading, part of the broker‘s job is to protect investors from fraudulent stocks. With online trading, though, people must research stocks on their own, deciding what to buy and
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Are we witnessing the slow death of the Traditional Investment Advisors? sell without the help of a broker or an investment planner. Fraudsters have taken advantage of this, leading to several notable methods of defrauding investors. These include:
Pump-and-dump schemes – People spread the word about a “sure thing” stock via online message boards, online stock newsletters, email and other methods. The resulting interest in the stock drives up the price. The organizers of the scheme sell their stocks for a huge profit, and then stop promoting it. The price plummets, and investors lose money.
Fraudulent IPOs – Some investors like IPOs because they provide a chance to “get in on the ground floor” and to make a substantial profit. Some scammers, though, spread the word about an upcoming IPO for companies that never intend to go public or that don’t exist. Then, they abscond with investor’ money.
Fraudulent OTC stocks – Con artists promote stock in companies that do not exist or start a pump-and-dump scheme for an OTC stock. After investors buy stock in nonexistent companies, scammers simply take the money and run.
Fraudulent company information – Publicly traded companies have to release information about financial performance. Overstating or misrepresenting a company’s goals and achievements can drive up the stock price.
The Risk of Hackers
No transaction online can be considered cent percent safe as there is always the risk of customers‘ accounts getting hacked. In the past years, there has been such attacks where hackers invaded customer accounts at online brokerage firms in the US and Canada and made unauthorized trades worth millions. Costly
Low cost was said to be one of the advantages. This may not always be the case. There is the presence of misleading commission chargers where some brokerage firms charge joining fees or membership fees which makes the prescribed initial fess less attractive. There is also the flat fee, as a percentage of the trade value, which some investors argue that it is higher than the commission traditional brokers charge. Some internet brokers even have recourse to third parties 18
Are we witnessing the slow death of the Traditional Investment Advisors? in order to trade stocks and the latter normally charge a commission for their services, which is often passed on to the investor. Lack of Information
Traditional brokers provide investors with all the required information for better decision making. On the other hand, online brokerage firms do not provide investors with adequate information. This is a reason why these firms charge lower fees as compared to traditional advisors. Ultimately, a lack of information will eventually hamper good decision making.
5.0 IS IT REALLY THE SLOW DEATH OF THE TRADITIONAL INVESTMENT ADVISORS?
Traditional trading conjures up images of an investor calling a stockbroker on the phone and placing a trade based on a hot tip. Online trading is self-driven. While traditional brokers advise clients and suggest an investment path, online traders are left to make their own investment selections and to decide when to buy and sell. Investors place trades online much in the same way that they buy books on Amazon for example. Traditional trading costs significantly more than online trading, usually at least double the cost, this is the main reason why many people are shifting towards online trading. It is also big advantage for online investing online are their lower costs and speed. No waiting for a phone call to be returned or a check to go into the mail because investors place trades that get processed with the click of a button. Online stock trading still trails the Almighty in popularity, but it is getting closer. Computerized trading is no doubt cheaper, faster and more convenient than dealing with a conventional brokerage. However, that does not mean that stockbrokers have become obsolete. The best way to decide which trading method is right for you is to list all the advantages and disadvantages offered by both options. Another great advantage offered by online trading is that it saves you money on stockbroker commissions. Web sites such as E*Trade, Ameritrade and SURETRADE charge you fees that are as low as $8 per trade. Many of these sites also have research tools available, so customers
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Are we witnessing the slow death of the Traditional Investment Advisors? can get real-time price quotes, news and market analysis, price charts, earnings estimates and historical prices. More than 7,300 brokers have left the four biggest full- service brokerages — Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas — from the beginning of 2009 through June, according to financial services research firm Aite Group LLC and company filings. Moreover, the traditional brokerage firm is rapidly losing assets, falling 16% at those top four firms between 2007 and 2009. Reasons for the shifts are many but began once decimalization started cutting into the spreads between bid and ask prices where brokers could earn commissions. From there, the combination of many banks with brokerage firms and the advent of discount brokerage firms hastened the decline, as did the tendency of bulge-bracket brokerage houses to push internal, higher-payout investment products and funds to their clients. Ultimately, discount brokerage firms – which give no advice and merely execute trades – began offering registered investment advisers turnkey platforms through which they could manage money. The wave of defections from traditional brokerage and into independent, fee-based advisers – not paid on commission and subject to more stringent disclosure and duty rules – started in earnest. And of course, the arrival of electronic trading and exchange-traded funds has placed even more pressure on the traditional brokerage model and the brokers themselves. If anything, though, these changes have proven to be net benefits for investors. Narrower spreads, discount brokerages and independent fee-based advisers have meant lower costs and greater access for individuals. Without middlemen, investors can buy and sell stock easier, faster and cheaper than ever before, making it even harder for brokers and advisers to justify their existence. Ultimately it can be said that the online trading is taking the edge and traditional investment advisors are losing their roles gradually.
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Are we witnessing the slow death of the Traditional Investment Advisors?
6.0 REFERENCES
‘An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes’ Nayantara Hensel, International Journal of Managerial Finance Vol. 5 No. 3, 2009 Applicability of the Investment Advisers Act of 1940 to Financial Planners, Pension Consultants, and Other Persons Who Provide Others with Investment Advice as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (Oct. 8, 1987) (―Release 1092‖).
Barber and Odean, ‘The Internet and the Investor‘, Journal of Economic Perspectives— Volume 15, Number 1—Winter 2001—Pages 41–54 Choi et al, ‗How does the Internet affect trading? Evidence from investor behavior in 401(k) plans‘; Journal of Financial Economics 64 (2002) 397–421 CHRISTIANSEN, H., 2001. Electronic Finance: Economics and Institutional Factors. Organisation for Economics Co-operation and Development, Financial Affairs Division, Occasional Paper, No. 2, Paris: France. GLAESSNER, T., KELLERMANN, T., and MCNEVIN, V., 2002. Electronic Security: Risk Mitigation in Financial Transactions Public Policy Issues. The World Bank. KELLERMANN, T., CISM AND MCNEVIN, V., 2005. Capital Markets and E-fraud, Policy Note and Concept Paper for Future Study. World Bank Policy Research Working Paper 3586. Scullion and Nicolas, ‗The impact of the web on the stockbroking industry: Big bang theory 2‘, Aslib proceedings Vol 53, No.1January 2001-3. Securities trading. Columbia Electronic Encyclopedia, 6Th Edition. Accessed November 5, 2013.
Toward a Fully Automated Stock Exchange, Financial Analysts Journal, 1971.
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Are we witnessing the slow death of the Traditional Investment Advisors? Wealth management journal, ‘Traditional Brokerage Model’s Viability in Spotligh’t, January 10, 2013 http://money.howstuffworks.com/personal-finance/online-banking/online-trading4.htm http://www.sec.gov/investor/pubs/invadvisers.htm http://www.investopedia.com/terms/i/investmentadvisor.asp http://en.wikipedia.org/wiki/Floor_trading http://www.wikinvest.com/wiki/London_Stock_Exchange http://www.world-stock-exchanges.net/top10.html
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