Strategy for Information Markets/Online Stock Trading Sites

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Background:[edit]

Online stock trading sites have experienced a steady increase in use and popularity due to simplicity. People are able to trade their stocks and make their own transactions on the computer, rather than having to call their broker and pay high commissions, which tend to be lower through online investment sites due to the intense competition. Information for such online brokerages is easily accessible for everyone. It is important for investors to take time in deciding which site (of the many) works best for their style of trading because profiting from online trades can be a slow process.

The internet offers a wide variety of online stock trading sites. With such a large range of options, users are able to find what works best for their style of trading and personal interests. Some of the most used and well known stock trading sites online include: Charles Schwab, E*trade, Fidelity, Firstrade, Muriel Siebert, OptionsXpress, Scottrade, TD Ameritrade, TradeKing, Vanguard, WallStreet*E, Zecco, Venom, Wells Fargo, FxPro, ShareBuilder as well as other helpful and resourceful sites. This causes a high taste for variety among users. Your typical user someone with a moderate amount of money under $100,000 may be looking for a site with specific tools that can give them analysis of stocks and articles related to companies they want to invest in. This typical user will be completely different from another user who may be a day trader. Day Traders have over $25,000 and trade stocks multiple times a day. This differs from the average investor because the other investor will not be making decisions day to day but rather for the long term. The second user will be looking for a trading site that will give him/her the most options and most features in order to ensure a competitive advantage in order to beat the market. This is only one example of how there can be tastes for variety in the market for online stock trading websites. Another type of user would not be very likely to be in the market for online stock trading. This user would be the professional who has limited knowledge and limited time as to how online stock trading works. This user would benefit from the traditional setting of having a broker who will invest his/her money. This type of user would be uninterested in entering into the market of online stock trading sites.

Wall Street and the trading of company stock has come a long way since the beginning of Wall Street in 1792. In May of that year the Buttonwood Agreement marked the very beginning of Wall Street. Dealers and auctioneers had a meeting under the buttonwood tree where they established a formal exchange for the buying and selling of shares. The market would be more structured and a standard commission for trading would be charged. Those that did not sign the agreement would have to pay a higher commission if they wished to trade.[1]

The world of online-brokerage houses has evolved substantially since Datek launched its services in 1996. Historically, the individual was forced to trade securities through brokers who would control the execution of the transaction while also charging high transaction and management fees. The information and technology that was later developed allowed for an online trading system where investors can not only view their stocks but trade on their own. The model for online-brokerage created a vehicle for the individual to manage their securities portfolios. This direct interaction between the individual and the markets dramatically increased the number of individuals participating in the market, expanded the retail brokerage market, and also introduced new pressures on the margins of brokerage houses. Specifically, if an individual is looking to trade securities, why pay $40 per trade through a traditional brokerage when an online brokerage can provide a similar service for $9.99? That said, lower costs demand that online brokers have a sufficient customer base and daily volumes in order to support the business cost structure which includes everything from staff to advertising.

The benefits offered from online trading are far reaching and this is another example of how the internet and technology have paved the way for increased information. Upon joining an online stock trading website you get benefits instantly. These include graphs, charts, projections and reviews all at the users’ fingertips. Many sites also have how-to tips as well as research tips and analysis of specific trades. Many websites will go over stock trading strategies in a presentation type setting. https://www.tradeking.com/ is an example of this; they have many tools for their users that they claim will give a competitive edge while trading. Many stock trading sites, and www.Zecco.com in particular, have stock reviews as well as mutual fund profiles to guide in the correct investment decisions. One important thing to note is that the amount that the site charges are a reflection of the user benefits. If you are going for the cheapest website in terms of online trading you will, more likely than not, get very little if any tools to help in your investing goals. Go back 50 years and the same amount of research and analysis took time to accumulate. Online stock trading websites allow people to have access to information that is put together by professional analysts and companies. This type of information would have been extremely difficult to obtain half a century ago.

Differentiation:[edit]

With the success of the early online brokers such as Datek and E-Trade, there was an influx of competitors and the need for differentiation became apparent between all participants, online and traditional brokerage houses. Because of all the options to the consumer, all players must differentiate in order to reduce customer churn. Examples of differentiation range from trade-able securities, to fees, to quantities of information and analysis. Most sites now allow customers to trade common stock, options, Exchange-Traded Funds (ETFs), index funds, etc. Fee and commission structures typically will vary based on the type of execution desired whether its limit, option, or margin trading. Online-brokerages also have increased the breadth of research tools available to its consumers. For example, an account with Ameritrade offers a stock screener, analyst recommendations, option chain analysis, charting tools, and industry multiple comparisons. Online-brokers even have educational material which allows the customer to learn more about trading, strategy, and market analysis.

When it comes to differentiating yourself from your competitors in the online stock trading world, a few options are possible. Referring to the Online Stock Trading Review from toptenreviews.com, the site displays reviews from consumers and online traders about what is most valuable to them and how each online brokerage tends to differentiate itself from competing firms. One way to make a site more appealing than a competitor’s is to avoid account maintenance fees. The fees and commissions portion of differentiation tends to be a large deal breaker to potential users. This policy will make low income consumers back away but then again consumers want the best deal possible. The fees/commissions which are mostly reviewed are market trades, limit trades, option trades, minimum account balances, and margin rates. Having a tiered commission structure is also another key feature in some sites. Another important feature that differs among competitors is the amount or type of investments offered. Reviews show that most users prefer to have options of such investments: Stocks, Options, Mutual Funds, Exchange-Traded Funds, International Stock Exchange, Forex, Retirement Accounts, and Educational Savings Plans. Not only are users looking for low prices, but also a menu of options for investing. Simplicity is yet another way for sites to differentiate themselves, and providing trading or investment tools is helpful for those who are looking for an easy route to online trading. Popular tools for these sites tend to be: calculators, alerts, virtual trading, Level I and Level II quotes, automated trading, charts and graphs, criteria based search tool/screeners, options chain/string, analyst research reports, and watch lists. A recent addition to optional tools demanded by some potential customers happens to be mobile tools. Not all of the top online trading sites offer this feature, but with the advancement of options with mobile phones continuing, more users are looking for this easily accessible alternative. To read more on this review, visit: http://online-stock-trading-review.toptenreviews.com/

If the market for online stock trading sites is rather full of commodity businesses, then the bottom-line to the consumer is typically price and execution. In managing securities, one hopes to be able to execute trades quickly and efficiently at the lowest possible cost. The hope of the brokerage house is that by providing the greatest breadth of services, customers will be less likely to switch to a competitor. This strategy may also fall into differentiation, but it would be a very mild form of it if this was the extent of the differentiated product.

Barry L. Ritholtz explained in his article titled “On Line Trading: A Business Plan for the future” that when you look past the price war in online trading, what is necessary to differentiate oneself from competitors is really a better business model. He mentions that a firm which can distinguish itself with a better business model can be more successful than other online brokers. He presents a series of ideas which will help achieve this type of business model, and these ideas include: Advertising, Blog, Commentary, Database, Education, and Fund. For more information on Ritholtz’s article and details of the business model, visit: http://bigpicture.typepad.com/comments/2005/06/on_line_trading.html.

When using a strategy to differentiate in a sense of focus and changing what to offer consumers, the idea is to essentially target and/or create a smaller market. This can lead to a repositioning of competition from direct to indirect when it comes to information goods such as online stock trading sites. In a blog about business strategies from tutor2u.net, the explanation of this type of differentiation is written as “In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers." Although this may not be the most precise definition of the strategy, it seems to sum up the plan of a business intending to place themselves into a smaller market. The idea is to make their specific online trading site more appealing to a certain group of consumers than any other site which they are indirectly in competition. By offering different, not necessarily better, tools and options, the business can target a smaller yet dependable group of consumers. Differentiation can allow a business in the information goods market to offer some consumers new options and meet needs that the other competing firms cannot.

Although previous paragraphs have mentioned the different options online stock trading sites can offer in order to create a type of differentiation (tools, fees, simplicity and such), it might be appropriate to look at differentiation from an easier perspective. An almost too simple yet very straight forward example of this form of differentiation can be seen with ice cream shops (although it does not relate to online stock trading sites whatsoever). In this market, almost all ice cream shops carry the same flavors in order to target a broad group of consumers. However, not all consumers may want the ordinary and everyday flavors. If one business in the market were to change their offering by making different (not always better) flavors, then they could possibly place themselves in a smaller market for those customers who prefer new and different flavors. By differentiating themselves with their menu, they will most likely not appeal to the broad market they were once in, but they could secure a group of consumers who are looking for a product just like theirs. Although they are still competing as an ice cream shop, it can be seen as indirect because the offered product is unlike the product of the competition.

When it comes down to it, it is difficult to draw fine lines between online stock trading sites for differentiation, and it could be true that consumers outside of the “smaller market” also find these features appealing. Quite a few businesses in this market offer similar features, making it hard to differentiate because of the market they are in (various information goods can be simply too difficult to differentiate with aside from basic features). But, if it were possible to change what the site is offering aside from the fundamental features seen in the Online Stock Trading Review, then perhaps an information goods business would be successful in a smaller market with indirect competition.

Emergence of Day Trading and Firms entering the Market[edit]

After the emergence of the first Online Stock Trading Site, Datek, there has been lots of competition among firms to enter the market and secure market share. After Datek’s debut online trading and reduced fees became extremely attractive and according to researchers the number of online firms increased from 12 to 140 in a 7 year span. This is also when the career and popularity of day trading came about. With online trading sites day traders can now do trades from home and take advantage of a whole new way to earn a living. Day Traders have also contributed to a lot of volatility in the market in the 1990s. There was a large amount of volume added to the market in the 1990s also due to day trading. From 1994/5 - 2001 the volume in the stock market tripled according to stock-trading-warrior.com Day Traders created a whole new market for firms to make money and firms benefited greatly from the increased volume. Also charging per trade is perfect for companies because many day trading strategies involve entering into positions to capture the movement of the stocks on a particular day, hence the term day trader. The fee per trade allowed for companies to capture fairly significant margins on each trade made from their site. The firm pays a very small percentage of the fee to execute the actual trade, this is why some sites can only charge $3 a trade. Firms moved quickly to create websites where investors could go to manage their own investments and take advantage of the new connection to the market previously reserved for professional investors and fund managers. This is a large change since the beginnings of Wall Street where only members could trade stocks and there were a very small number of them.

Why is online trading so popular?[edit]

A core reason for this growing popularity of online trading is the demand from stock traders to reduce operating costs, seeing that many people want to avoid the charges of a stock broker’s commission fees. Due to technology, this form of trading is now possible and widely used for its cheaper deals.

Traditional brokerage requires you to call your broker every time you want to buy or sell any particular stocks. Furthermore, it may involve some type of conversation in which the broker questions whether the investment is suitable given the investors situation. As such, there is a delayed execution which can represent a potential loss of gains or potential increase of losses. Not to mention greater fees.

Thus, the popularity of online brokerage has also primarily derived from the ability to execute trades as desired without going through a third party. Furthermore, the cost to execute these trades is at a significant discount, and the information made available through online brokerages in terms of tools and analysis have vastly improved over the years. That being said, individuals can utilize both the traditional and online brokers to optimize their capabilities. Specifically, it is assumed that there remains some information that is held by a traditional broker which is unavailable to the online brokerage house. This information could be derived from analyst research or industry contacts that give a broker an edge over information available to the masses.

Therefore, to take advantage of both options, there are some people that will retain their traditional brokerage accounts to gain access to proprietary information while also keeping a personal online brokerage account to maintain trading control. An additional reason to maintain a traditional brokerage is for access to new offerings (IPOs) and for thinly traded securities. Traditional brokerage houses can gain access to public offering allotments, and for low-volume stocks a broker can help pair up the buyer and seller.

When it comes down to it, online trading is known for its low costs and its speedy execution. With a growing culture of people working from home, online stock trading seems to be the optimal choice for potential users. Simplicity, the option of multi-tasking, and the “anytime, anywhere” effect of these sites make the idea even more appealing.

References[edit]

  1. Wall Street: A History. 

http://www.stock-trading-warrior.com/History-of-Online-Stock-Trading.html