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The market never sleeps

Isamu Tanaka, my Japanese friend who made tons of yen as a stockbroker in the Japanese bubble economy, claims that buying stocks or options on Wall Street is easier than buying cabbage.

Isamu, you see, exaggerates a lot. Even my nine years old nephew can tell a good cabbage from bad. But with my 13 years experience in financial journalism, I cannot predict with full certainty how a royal blue chip like Microsoft may fair in the next couple of decades. The future of Microsoft depends not merely on how Bill Gates manages the company but on how fast car garages around the world churn out capable entrepreneurs who can turn Microsoft products obsolete. It also depends on the verdict of US anti-trust lawyers on the various cases going against Microsoft.

But Isamu does have a point. To buy a cabbage, I have to go to the nearest supermarket, or what we call subzi-mandi, which is a good ten minutes drive from my apartment. But to enter the world of global finance and dabble in stocks I don't even have to step out of my little bed. With a click on the mouse of my laptop, I can buy or sell stocks. Unlike earlier when I had to look for a friend like Isamu, who could find me a reliable broker, now I can do my own trade by paying a small commission of between $ 12 to $ 25 dollar per transaction, depending on the internet broker I chose. As against normal trading on the floor through stockbrokers, where I have to pay a much higher commission normally two per cent of the trade value.

As it happens with anything that is bought or sold on the internet, competition drives down prices at the speed of light. The other day I saw an ad on The Financial Times by the European branch of Charles Schwab. One of the better known e-brokers, Charles Schwab has offered a 30-day commission-free trade on the internet from August 23. Next you will see several other internet brokers advertising similar offers. And finally, (yes, you guessed it right) the commission of trading on the web may fall to $ 1 to $ 2 per trade.

Charles Schwab Europe allows you to trade in stocks in both the US and the UK. You can place orders for stocks, mutual funds, options, treasuries and corporate bonds. Customers can choose from over 200 funds in the Mutual Fund Center.

Instinet, the electronic network of Reuters Group, allows institutional investors to trade directly in over 40 markets around the world 24 hours a day. Institutions can trade in several securities even after the traditional stock exchages, the New York Stock Exchange and NASDAQ are closed after 4'o clock in the evening.

Soon evening trading would be open for individual investors as well. E*Trade Group Inc., the second-largest Internet Broker in the US has signed an agreement with Instinet to allow individuals to trade until 6:30 p.m.

The significant thing about several e-brokers is that they do not have their own inventory of stocks. So they are not in conflict with the clients they represent. They charge customers only the commission for executing their orders. Instinet, according to its web-site, now represents in excess of 90 per cent of the institutional funds under management in the US and trades, on average, more US stocks each day than any other broker.

Apart from low commission and neutrality of e-brokers, trade through the web provides anonymity to the customers. So the market remains oblivious till the transaction is conducted that a big institution has traded in a particular stock. Compare that with traditional trading in India or elsewhere. The market in India reacts at the mere news that UTI may be buying or selling in bulk.

Electronic trading of stocks is forcing stock exchanges to restructure themselves. Hitherto run on the lines of country clubs by a group of privileged people or corporations, the New York Stock Exchange and NASDAQ are planning to go public by mid-November.

The feudal lords of NYSE and NASDAQ have noticed the threat from the internet. Card-carrying members of both NASDAQ and NYSE are investing heavily on ECNs (electronics communications networks). Member firms of NYSE like Merrill Lynch, Morgan Stanley Dean Witter and J P Morgan have each invested millions of dollars in companies engaged in electronic trading like OptiMark Technologies, Archipelago Holdings and BRUT. NASDAQ is even thinking of setting up its own super-ECN.

At the same time, the big exchanges have realised that they can survive competition from electronic trading only by adopting a corporate structure, which will force them to price their services competitively. They too will have to charge $12 per trade or less like e-brokers to attract investors. Also, a corporate structure will enable them to have ready access to capital, and therefore, the ability to make critical acquisitions.

So Isamu was not quite exaggerating. Trading through the web is not merely convenient; it is also cheaper and more democratic.

(Neeraj Kaushal is a financial journalist who lives in New York and is a former senior editor of The Economic Times)

Neeraj Kaushal

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