Sec - Online Brokerage. Keeping Apace Of Cyberspace(PDF)

The Report provides a number of statistics to put in context the growth andactivities of on-line investors and firms. It also describes the various products and servicescurrently offered on-line. Finally, the Report describes various trends in the industry,including: (a) the continued growth of on-line investing and the pressure it has put ontraditional firms to offer on-line services; (b) how the growth of on-line brokerage will impact the services firms offer going forward; and (c ) how firms are developingtechnology to provide automated, but personalized, advice on-line. ...
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Sec - Online Brokerage. Keeping Apace Of Cyberspace(PDF) On-Line Brokerage: Keeping Apace of Cyberspace EXECUTIVE SUMMARYI. INTRODUCTION Recent advances in information technology -- particularly the Internet -- arerevolutionizing commerce. The securities industry, most significantly on-line brokerage, isat the forefront of this revolution. Research reports estimate that last year’ $415 billion in online brokerage assets swill grow by more than sevenfold to $3 trillion in 2003. The 3.7 million on-line accountsopen in 1997 have almost tripled to reach 9.7 million by the second quarter of this year.On-line trading volumes have increased dramatically over the last several years.According to one analyst, volume has increased from under 100,000 trades per day in thesecond quarter of 1996 to over half a million in the second quarter of 1999. Thepercentage of equity trades conducted on-line has grown to 15.9 percent of all equitytrades in the first quarter of 1999. On-line brokerage has significantly changed the dynamics of the marketplace,causing one of the biggest shifts in individual investors relationships with their brokerssince the invention of the telephone. For the first time ever, investors can -- from thecomfort of their own homes -- access a wealth of financial information on the same termsas market professionals, including breaking news developments and market data. Inaddition, on-line brokerage provides investors with tools to analyze this information, suchas research reports, calculators, and portfolio analyzers. Finally, on-line brokerage enablesinvestors to act quickly on this information. The pace of change and the strength of the securities markets generally has enabledinvestors to more directly participate in the securities markets. This confluence of events -- the development of technology affordable to investors and increased investor access --has raised a number of questions for the industry and the regulators. The questionsaddressed in this Report are: 1. What will the brokerage industry look like in the future? Where is it headed? The Report provides a number of statistics to put in context the growth andactivities of on-line investors and firms. It also describes the various products and servicescurrently offered on-line. Finally, the Report describes various trends in the industry,including: (a) the continued growth of on-line investing and the pressure it has put ontraditional firms to offer on-line services; (b) how the growth of on-line brokerage willimpact the services firms offer going forward; and (c ) how firms are developingtechnology to provide automated, but personalized, advice on-line. 2. What challenges do regulators face in applying the suitability doctrine on-line? A well-established doctrine, suitability refers to a broker-dealer’ obligation to srecommend only those investments that are suitable for a customer. In order to trigger asuitability obligation, a registered representative must make an investmentrecommendation to his or her customer. In the on-line environment, pinpointing whatconstitutes a recommendation can be difficult. As data mining technology enables on-linefirms to customize information and provide it to customers, this question becomes evenmore pressing. 3. How has technology impacted on-line firms’ performance and evaluation of their best execution obligations? The duty of best execution requires a broker-dealer to seek the most advantageousterms reasonably available under the circumstances for a customers transaction. Althoughthis duty evolves with changes in technology and market structure, the Commission hasstated that broker-dealers must carry out regular and rigorous evaluations of executionquality across markets and consider price improvement opportunities. The combinedevents over the last three years of : (a) the growth of on-line brokerage, (b) the move toquoting in sixteenths,( c) implementation of the Order Handling Rules, and (d) advances in order routingtechnologies have impacted how firms approach fulfilling their best execution obligations. 4. How have on-line investors’ demand for market information impacted the pricing of real-time data? The federal securities laws grant the Commission broad authority over informationabout securities quotations and transactions. The Commission must ensure that marketparticipants and the public can obtain this information on terms that are fair andreasonable and not unreasonably discriminatory. The Internet’ ability to broadly ...