EFFECTS OF ONLINE TRADING ON THE INVESTMENT COMMUNITY.docx

EFFECTS OF ONLINE TRADING ON THE INVESTMENT COMMUNITY.docx

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EFFECTSOFONLINETRADINGONTHEINVESTMENTCOMMUNITY

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EFFECTSOFONLINETRADINGONTHEINVESTMENTCOMMUNITY

ABSTRACT

Onlinetradingisoneofthelatestwaystoinvestthathasgainedpopularityinrecentyearsasinvestorsbecomesavvier.Thisstudydiscussesonlinetradingeffectsoninvestorsandbrokers.Italsoevaluateswhatcharacteristicsmostonlineinvestorsshare.Itthenexamineshowforeigninvestorsarehandlingtradingonlineintheirowncountries.Finally,itobservesthefutureofonlineinvesting.Overall,withtheconvenienceofonlinetrading,itlookslikeitwillincreaseinpopularity.However,investorswillhavetoweighthebenefitsversusthecostsandseeifonlinetradingisrightforthem.Also,brokersmustchangetheirservicestoaccommodatethisnewbreedofinvestors.

INTRODUCTION

WiththeincreaseduseoftheInternetaroundtheglobe,itisonlynaturalthatmoreandmoreproductsandservicesarebeingofferedovertheWorldWideWeb.Therefore,itisnosurprisethatfinancialservicesarebeingofferedbymanyonlinecompanies.Infact,overthepasttenyearstheInternethasbecomeanimportantwaytodistributefinancialproducts（Vakil&Lu,2005）.Thefactsregardingonlinebrokeragesshowitsamazinggrowth.Thenumberofpeopleinvestingonlinehasincreaseddramaticallysincethefirstfewdiscountbrokeragefirmswentonlinein1997.Infact,therewereonly30discountbrokeragefirms（DBFs）onlineintheUnitedStatesin1997andinthespanofthreeshortyearsthenumberincreasedto200（Yap&Lin,2001）.Also,theresearchfirm,NFOWorldwide,locatedinGreenwich,Connecticutestimatesthataround6.3millionpeoplehavebrokerageaccountsonline（Opiela,1999）.

Thispaperwilldiscussthereasonforonlinetrading’ssubstantialgrowthbylookingatthebenefitsandcostsassociatedwithonlinetradingfromtheinvestor’spointofview.Sinceinvestorsarenottheonlyonesaffectedbytheadoptionofonlinetrading,thispaperwillalsolookatthepositiveandnegativeeffectsthatthisnewtrendhashadontraditionalbrokeragefirmsandfinancialplanners.

Onlineinvestingiscreatinganewbreedofinvestorsthatshareacertainnumberofcharacteristics.Thesecharacteristicswillbediscussedatlength,aswellasanychangesinthesecharacteristicsthatmightappearinthefutureastheInternetbecomesmoreaccessibletoalltypesofusers.Withtheincreaseinonlinetrading,geographiclocationhasbecomeirrelevantwiththeabilityforforeigninvestorstotradefromoverseas（Yap&Lin,2001）.Thispaperwillalsoexaminecharacteristicsofforeigninvestors,aswellasdiscusswhatothercountriesareallowingonlinetradingintheirmarketsanditseffects.Afterexaminingthefutureofonlinetrading,howonlinetradinghasaffectedthefinancialindustrywillbeanalyzed.Thispaperwillthenbesummarizedandconcludedwithwhatwehavelearnedregardingthistypeofinvesting.

LITERATUREREVIEW

BarberandOdean（2001,2002）studiedtheimpactthattheInternetishavingoninvestorsandfinancialmarkets.Theirfirststudy（2001）examinedhowtheInternet,withitsabundanceofinformation,isaffectingonlineinvestors’decisionsbecauseofanillusionofknowledgeandanillusionofcontrol.Theyfurtherstudiedthisphenomenoninasecondstudy（2002）andtheyconcludedthatafterdecidingtotradeviatheInternet,investorsmakemorefrequenttrades,moreriskytradesandmakelessprofitthantheydidpriortoswitchingtoonlinetrading.

AnarticlebyHurley（2000）discussedhowonlinestocktradingcreatedanurgetotradeandadesirefortheinvestortohavemorecontroloverwhattheyareinvestingin.Opiela（2000）lookedatwhetheronlineinvestingisanopportunityorahindrancefromtheviewpointoffinancialplanners.Inasecondarticle,Opiela（1999）onceagaintouchedontheprosandconsofInternettradingfromtheviewpointofprofessionalsinthefinancefield.ShestatedthatalthoughtheInternetmayprovidespeedandconvenience,itfailstoprovidethesameadviceasaprofessionalforlongtermplanninganddiversification.

Fan,Stallaert,andWhinston（2000）studiedtwoissuesthatareimportanttotheefficiencyoffinancialmarkets:

orderroutingandorderexecution.TheylookedathowtheInternetisaffectingwhereordersforstocksarerouted.TheyalsodiscussedwheretheorderswillbeexecutediftheyareoriginallyplacedontheInternet.VakilandLu（2005）evaluatedhowtheInternethasaffectedthecapacityandvolatilityofthestockmarket.Accordingtotheirresearch,sinceonlinetradinghasstarted,newinvestorshaveemergedthattrademoreaggressivelyandinhighervolumeandthisinturnhasledtoanincreaseinstocktradingandvolatilityinthemarket.

Bhasin（2005）examinede-brokeringandhowe-brokeragefirmscanmarketfinancialservices.Hediscussedthebenefitsofthelowertransactioncostsandtheconvenienceofonlinetradingfortheinvestor.InaseparatearticlebyPhelan（2001）,thedifferencebetweenfullservicebrokersandonlinebrokersispresentedandadiscussionabouttheneedforgoodonlinesecurityisexamined.AnotherstudybyGloberman,Roehl,andStandifird（2001）assessedhowe-commercehasaddedtotheretailbrokeragebusiness.Brokersarenowonlineandthuscanprovidelowercoststotheircustomersalongwithalargervarietyofinvestmentinformation.Finally,YapandLin（2001）examinedhowonlinetradingsystemsarechanging.Theythinkthatfutureonlinediscountbrokeragefirmswillevolvefromsystemsthatprovidebasicserviceslikelowtransactioncosts,speed,andboundaryspanningtosystemsthatwilleventuallybeabletoprovidetheone-on-onepersonaladvicethatonlinebrokeragefirmsarenowmissing.

LewisonandBernstein（1996）wroteanarticlewhenonlineinvestingwasstillinitsinfancy.Theydiscussedhowtomatchtheinvestors’needswiththerightonlinebrokeragefirm,howtoavoidsalespitches,andhowtothinkaboutsecurityneedsbeforeonebeginstoinvest.Hong（2000）studiedtheinformation-processingcoststhatcanoccurfromonlinetrading.Hediscussedhowmanyonlinetradersarenewtotheinvestingworldandarethereforenaïveabouthowtogoaboutinvesting.Konana,Menon,andAbramowitz（1999）exploredtheobservableandunobservablecostsassociatedwithonlineelectronicbrokerages.Asecondarticlebytheauthorsin2000lookedatverifiableversusunverifiablecosts.Verifiableandobservablecostsarethedirectcostsassociatedwithtradingonline,likecommissions.Unverifiableandunobservablecostsareindirectcoststhatresultfromwaysthatelectronicbrokerageschoosetocompletetheirtransactionsandhowthedifferentlocationscouldindirectlyaffecttheinvestor.

SinceonlineinvestingisnotaphenomenonaffectingonlytheUnitedStatesbuttheworldaswell,articlesdiscussingInternettradingindifferentcountrieswereanalyzed.Cocca（2002）studiedthecharacteristicsofonlineinvestorsinSwitzerlandandtheeffectsthatonlinetradinghashadontheSwissmarket.Teo,Tan,andPeck（2004）evaluatedtheattitudesofpeoplewhotradestocksonlineaswellastheattitudesofthosewhodonottradeonlineintheSingaporemarketplace.Finally,Goswami（2003）examinedtheneedsofinvestorsthataretradingonlineinIndia.Hecomparedtheneedsoftheinvestorstowhatonlineinvestingwebsitesareofferingandthentriedtobridgethegapbetweenthetwo.

BENEFITSOFONLINETRADINGTOINVESTORS

Someonlinebrokeragefirmsreported100+percentannualgrowthratesthroughtheyear2000（Vakil&Lu,2005）.Theincreasewasbecauseofthebenefitsinvestorscangainfromonlineinvesting.Thesebenefitsincludelowtransactioncosts,speed,convenience,boundaryspanningabilities,andimmediateaccesstofinancialinformation.AccordingtoOpiela（2000）,transactioncostshavebeendrivendownbecauseoftheincreasednumberofonlinebrokeragefirms.Infact,thedramaticincreaseofonlinebrokeragefirmshasledtoincreasedcompetitionandloweredcommissionsthataninvestormustpaypertrade（Konana,Menon,&Balasubramanian,2000）.

Alongwithlowtransactioncosts,themainstrategyofonlinediscountbrokeragesisthespeedanddeliveryofalmostinstantaneoustransactions（Yap&Lin,2001）.Intoday’sworldoffastfoodand24-hourservice,investorscannothelpbutwantthesametypeoffastserviceappliedtothefinancialindustry.Thatiswhymanyinvestorsenjoytheconveniencese-brokeragesofferbyallowingthemtogoonlineandcompletetransactionsatalmostanytimeduringthedayornight.Timeissavedbecauseinvestorsdonothavetophonetheirbrokerduringnormalbusinesshoursinordertocompletetheirtransactions.

Anotherbenefitofonlinetradingisitsabilitytospanboundaries.Manyinvestorsareinterestedinbuyingforeignstocksandwithonlinetradingsystemsinplace;theseinvestorsaredrawntoitsboundaryspanningcapabilities（Yap&Lin,2001）.ThisisalsotrueforforeigninvestorswhowanttoinvestintheU.S.market.Now,withtheInternet,theyhaveeasieraccesstomaketheiroverseastransactions.

Afinalbenefitinvestorscanderivefromonlinetradingisaccesstoinstantaneousinformation.VakilandLu（2005）statedthattheInternethasgivenpeopleaccesstoimmediatefinancialinformationwhenevertheywantit.Theyfeltthattheavailabilityofthisfinancialinformationshouldleadinvestorstomakebetter-informedchoices.ThisthoughtisalsosharedbyBhasin（2005-2006）,especiallysincetheinformationthatisnowavailabletotheaverageinvestorwasonceonlyavailabletopeopleworkinginthebusinessoffinance.

COSTSOFONLINETRADINGTOINVESTORS

Evenwithal