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Paper Abstract: Analysis of the retail financial securities brokerage industry in the U.S. Major transition of the retail segment of the investment banking business. Impact of Information Technology (IT) and other sources of change. How sweeping change will affect the industry. History of the industry; trading; business challenges; competition. Consumer demand. Financial concern. Financial regulatory system. Risk. Ethical concerns. Paper Introduction: RETAIL BROKERAGE INDUSTRY: AN ANALYSIS Introduction This research develops an analysis of the retail financial securities brokerage industry in the United States. As is true for many industries in the contemporary period, the retail segment of the investment banking business finds itself in the midst of a major transition in the way in which the industry conducts its business. Many of the changes that are occurring in the industry derive from the ways in which advances in information technology (IT) are affecting the industry. There are, however, other important sources of change that are affecting the industry. Foremost among these other sources of change is government. To be more specific, this source of change involves the elimination of laws and regulations that, in the past, cons Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. It's notthe technology he's afraid of. (1999, February 22). (1999, November 22). The investorrevolution: Who needs a broker? The legislation would have repealed the Glass-Steagall Act and permittedbank holding company affiliates to underwrite and distribute bothsecurities and insurance. (1989 May 15). Many investors were ruinedfinancially, and the entire system of chartered limited liability companieswas thrown into disrepute. The recommendations for full-service brokers are to redefinetarget markets and then to realign strategy to address those markets. Dealing, which alsoinvolves market making, requires an institutional investment bank to buyand sell financial securities in the secondary markets, and to holdinventories of such securities in its own account (Pugel & White, 1985). It's the paper trail. Prospects for enactment of the law in 1999 wereuncertain because of major changes in key committee leadership in the bothHouse of Representatives and the Senate as a consequence of the generalelection in 1998 and because of critical differences in objectives forfinancial reform between Republican leadership in the House and the Senateand between Congressional Republican leadership generally and the ClintonAdministration. Retail brokerage is assuming increasing significance in the Americaninvestment banking industry. Within this scenario of change, thefollowing research question is addressed in this research: Will retailfinancial securities brokerage survive past 2 1 ? Today, the entry into the market of new investors through onlinebrokerages bring along also ethical concerns. Levine, D. The qualification is that the retail brokerage industrylikely will become segmented. (1991). Boesky testifies of secret deals. Newsday, A23. His secret was the use of insider information on which tobase his decisions (Perone, 1987). Many investment bankers would proclaim that an entire industry cannotbe condemned for the actions of three men. As Boeskyimplicated scores of other people in his illegal dealings in order to sparehimself a great deal of misery, he does not have a loyal following offormer associates. (199 May 27). Theproblems concerning human resources, however, are not the same for onlinebrokers and full-service brokers. Additionally, Milken retains hundreds of loyalfollowers among the people he worked with prior to 1989. Prior to 1987, the five-firm market share never rose above6 percent (1947-1949), and the 1 -firm market share never rose above 79percent (1983). Recommendations and Conclusions This research developed an analysis of the retail financial securitiesbrokerage industry in the United States. With thecreation of the Philadelphia Stock Exchange, the first formal stock marketin the United States was established. Soon thereafter, athird American stock exchange was established in Baltimore. Glass-Steagall prohibited commercial banks from(1) the speculative use of deposits, (2) acting as agents in security loansto brokers or dealers of financial securities, (3) extending credit for thepurchase of financial securities, (4) owning security dealer affiliates.Loopholes pertaining to bank holding companies in Glass-Steagall permittedsome commercial banks to circumvent these prohibitions. Should the onlinebrokers and other changes sweeping the retail brokerage industry eliminatemarket makers, the attraction of the stock market would soon lose itsluster for most traders when confronted with an inability to sell theirholding instantly. Securities brokers are known more formally as investment bankers.Investment bankers come in two general stripes-institutional brokers andretail brokers. Gluck, A. To be morespecific, this source of change involves the elimination of laws andregulations that, in the past, constrained some of the very changes nowoccurring in the industry. This widely heldperception does not lessen the significance of the problem. Among these firms are the market makers,those brokers who hold securities in their own names and assure that abuyer will always be available for an investor who wants to sell. Lastly, while the retail brokerage industryalways has had its share of people who skated on the very edge ofacceptable ethics, along with many who tumbled into the ethical abyss, thesweeping change now engulfing the industry threaten to make Ivan Boesky andMichael Milken look like choir boys. Pugel, T. New York: JohnWiley & Sons, pp. These men, however, acted withalmost the full, but unacknowledged, knowledge of the investment bankingindustry. With respect to ethical concerns, may within the retail brokerageindustry said some decades ago, as well as more recently, that the actionsof Boesky, Milken, and Leeson were, after all, simply the actions of threemen. An analysis of the competitiveeffects of allowing commercial bank affiliates to underwrite corporatesecurities. Such customerdemands constitute real threats to full-service brokers and to the retailbrokerage industry.Financial The threat of lower trading commissions could be deadly for many full-service brokers. While manyopinions have been offered, no definitive answer has emerged. Smilon, M. The Hamilton proposal lit a wildfire intense speculation in theRevolutionary bonds, and, in 179 , the first stock exchange in the UnitedStates, the Philadelphia Stock Exchange, was established. http://www.banking.com/aba/trustinvestments_ 999.asp Perone, J. The anticipated English trading monopoly did not materialize,and the value of the shares in the English South Sea Company crashed in172 , becoming known as the South Sea Bubble. When the BankHolding Company Act became effective in 1956, the one-bank bank holdingcompany loophole permitted some banks to continue circumventing thesecurity dealing prohibitions in Glass-Steagall, until the loophole wasclosed in 197 . In late-1979, work was initiated in the Congress to overhaul thecountry's financial regulatory structure. In spite of the convictions and prison sentences, both Boesky andMilken were successes in business, and not only prior to the convictions.Although both men were required to pay enormous fines, both were also ableto retain millions of dollars earned during the height of their securities-related activities. Thus, some degree of competition between investment andcommercial banks was instituted; however, to a greater extent, thefunctions of the institutional types remained exclusive. Riley, J. M. B1). The basic law inthis regulatory structure was the Banking Act of 1933, commonly known asthe "Glass-Steagall" Act. Decades were required to restore public faith in investment in limitedliability companies. By 1991, the Merrill Lynch market share haddropped to one-third of total industry revenues, which remained higher thanany single-form market share prior to 1987 (back through 1934). html Regnier, P. Law and deregulation also open the door to discount brokerage 25 yearsago when commissions on stock trades were deregulated in 1975. Journal ofEconomic Issues, 3 , 493-5 8. New YorkNews, 1. He concealed the unprofitableoperations of the New York branch of Japan's Daiwa Bank. If they are to compete on price, they will have to reducethe level of services that they provide, and they will have to forego theservices of account representatives (Vinzant, 1999).Human Resources Human resources constitute a problem for the retail brokerageindustry, regardless of the brokerage type-online or full-service. Customers also are demanding lower prices from retail brokers.Television broadcasting is full of commercials touting trades under $1 ,under $15, or under $3 . J. Both the New York Stock Exchange and theNASDAQ have recently flirted with the idea of extending trading hours intothe evening. Thus, wasestablished the formal stock market in New York City. Others, however, aredoing nothing new, as the rush of new investors in the present environmentis sufficient to satisfy the needs of both full-service houses and onlinehouses. This action was designed topermit investors to adjust portfolios subsequent to review of the day'sactivities. Initially, major investment banks in the three world regions offeredtheir services to investors in each of the other regions through thisadvanced technology during the normal hours of operation in their homecountries. 93-143. Foremost among these other sources of change is government. Industry Responses, Strategies, and Solutions Some full-service brokers are responding to the competition threat byestablishing their own online brokerage services. If so, then the auctioneers may be returning after an absenceof more than 2 years.Legal/Regulatory/Political The financial regulatory system in effect in the United States priorto 198 was largely the result of responses by the federal government tothe financial crises of the late-192 s and early-193 s. Challenges that theindustry must meet effectively if it is to survive.Competition Concentration, within the context of industry structure, refers toboth the (1) number of firms participating in a market, and (2) the size ofthose firms in relation to one another. Brokerage involves the execution of customer buy and sell orders. Rather, itsimply spreads the culpability (Putnam, Lovell, de Guardiola, & Thornton,1999).Other Another problem also confronts the retail brokerage industry. Trading in financial securities was stimulated to asignificant extent, however, in 179 , subsequent to the AmericanRevolution. Rather,the speculation is that the industry will become much less concentratedquite quickly (again, at least over the near term).Marketing and Customer Demand Customers are demanding more that the capacity to trade from thecomfort of their own homes and offices through the use of their owncomputers. While higher margins likely will cause somedaytraders to stop and think, the strategy also is designed to protect theonline brokers themselves who stand to be big losers if online investorscannot cover their margins. Informal trading in the shares of limited liability companies began inBritain's American Colonies around 1725, five years after the South SeaBubble. Both the regulatory structure and the structureof the country's financial system were transformed through theimplementation of the two banking decontrol acts. (1985). The SEC action permitted the conduct of two separate after-hourstrading sessions. The growth ofsignificant financial markets in Asia, as a complement to those in WesternEurope and the United States, has created a demand for 24-hour per day,seven-day per week trading. It was speculated that the success ofthe after hours trading experiment would lead to 24-hour trading on the NewYork Stock Exchange. Levinsohn, A. Business Week (3617): 113. In the second session (one hour, 15 minutes), computer-driventrades involving a minimum of 15 stocks with a minimum trade value of $1million could be executed. Lastly, no one appears to be concerned about the potential for theloss of market makers. By contrast, full-service brokers tend to be up to their ears inhighly educated and high priced products of the Harvard, Columbia, andWharton business schools who know everything there is to know about tradingfinancial securities, with the exception that is of how to do it cheaplyand online.Technology Advanced communications technology has made possible the instantaneousconduct of financial transactions on a worldwide basis. Having thisadvance knowledge gave Boesky a tremendous advantage over other traders. Newsday,B1, B3. There are,however, other important sources of change that are affecting the industry. The American investment banking industry has, since 1934, been ahighly concentrated industry, with a single firm throughout the 1934-1991time period accounting for a minimum of 11 percent of industry activity.During the Bull Market following the 1981-1983 economic recession, MerrillLynch threatened to virtually take over the industry, reaching a marketshare of 4 .7 percent in 1987. (1989 April 27). This apparent omission may be the worst threatconfronting the online brokerage industry, as in the absence of marketmakers, securities trading will be little different from betting on horsesin the absence of parimutuel. Why your broker hates e-mail. Money, 154, 156-158. Commercial banks, as anexample, were permitted to underwrite government, but not corporate,securities issues, and investment banks were permitted to provide limitedcommercial banking services, such as checking accounts supported byinvestment funds. Some full-service brokers have slowed theirhiring of newly minted MBAs in response to the changing environment withinthe industry; however, most appear to be playing a waiting game. In 1773,the world's first formal stock market was established with the formation ofthe British Stock Exchange in the City of London. For a substantial proportion of retail brokerageinvestors, fee levels are the key to broker selection. Putman's Sons. As is true for many industries inthe contemporary period, the retail segment of the investment bankingbusiness finds itself in the midst of a major transition in the way inwhich the industry conducts its business. Further, acts of insider trading and reckless currencyspeculation on smaller scales are replete in the investment bankingindustry. Neither the full-service brokers nor the only line brokers appear tobe addressing their human resources problems to any great extent. (1999, September). In a major departure from traditional Americansecurities trading rules requiring immediate disclosure, after hour dealswere not reported for three days. Fortune, 251, 253-256. The recommendations for online brokers are to slow down long enough totrain accounts personnel adequately and to adopt meaningful ethicspolicies. (1987 December 18). The Depository InstitutionsDeregulation and Monetary Control Act of 198 was enacted, and thislegislation was followed two years later by the complementary DepositoryInstitutions Act of 1982. The English South Sea Companywas established in 1711, on the basis of an assumption of an eventualEnglish monopoly on European trade with Pacific and South Americancountries. With the advent of online trading, the proportionapproximates 5 percent in January 2 . Waterson, M. This strategy was soon followed by the creation of subsidiaryinvestment banking firms in each of the other regions, a strategy whichenabled those investment banking firms taking such action to deal onvirtually a 24-hour per day basis. Ivan Boesky found a way to take all of the uncertainty out ofarbitrage, as well as to remove any potential for a financial loss on suchtransactions. Many, perhaps most, of the accountspersonnel at online brokers suffer from a knowledge deficit in relation tothe brokerage industry, although they tend to be highly knowledgeable withrespect to the use and application of information technology (Spiro & Baig,1999). Concentrationis typically expressed as the proportion of total industry sales controlledby a specified number of firms. New YorkPost, B1. A comprehensive financial services reform bill (HR1 ) was passed theHouse of Representatives in 1998 but was not enacted by the 1 5th Congress. The agreement providedthat securities brokers would deal only with one another, a process thatconveniently, at least for the brokers, excluded the auctioneers fromfurther direct participation of the securities market). Glass-Steagall also prohibited investment banks fromproviding commercial banking services. Informal securities trading in the American Colonies continued to growat a steady rate. While this issue isserious, it should not be laid entirely at the foot of the online traders,as few people in the United States today are able to conceive that a stockmarket downturn can last for more than a few days. Whilethese market makers earn an unbelievable high margin-55 percent at the NewYork Stock Exchange, they also assume huge risks. Some recent innovations in internationalfinance: Different faces of risk management and control. Most of the early trading on thePhiladelphia Stock Exchange involved Revolutionary War bonds. Thus, a significantdemand has developed for the discount broker. As these data indicate, the American investment bankingindustry was becoming increasingly concentrated in the early-199 s. Alas, such did not occur. This trading grew out of an auction market that had developed atthe foot of Wall Street in New York City. Description and History of the Industry The world's first stock market crash occurred in London before aformal stock market was ever established. Itdiffers from dealing significantly, in that the investment bank does nottake positions in its own name in the issues traded. Onlinebrokers continue to signup the IT savvy as fast as they can, while doinglittle to upgrade the knowledge levels of their accounts personnel withrespect to securities trading. A 199 survey conducted by the New York StockExchange found that approximately 51 million Americans own financialsecurities. Offsetting this deficit, however, is the fact that3 percent of full-service retail brokers do not even have an e-mailaccount, much less an online trading capacity (Regnier, 1999). Many of the changes that areoccurring in the industry derive from the ways in which advances ininformation technology (IT) are affecting the industry. Thisincreasing concentration was expected, at that time, lead to furtherconcentration through merger and acquisition activity, as the smaller firmsfound it increasingly difficult to compete. Peoplehave predicted for 25 years that the exchange will give way to some kind ofelectronic trading. These offers are real and the average onlinetrading commission is about $15 compared with approximately $25 per tradefor at a full-service brokerage firm (Spiro & Baig, 1999). While many of these individuals have positions in individual stocksand bonds, it is estimated that an equal number direct their investmentstoward mutual funds. Short cuts. Such will not be the case, however, over the long-term. Deregulating Wall Street. In January 2 , however,online traders can trade whenever they want to. Mostmajor firms in the retail brokerage firms industry also conduct aninstitutional brokerage business. In 1989, Milkenwas convicted in federal court on 98 counts of securities-relatedracketeering (Levine, 1991; Gluck, 199 ; Riley, 1989). (1996 June). Securities trading now began toassume and importance that caused New York City securities traders todemand a facility of their own (similar to the Philadelphia StockExchange), where they could escape the near monopoly of the auctioneers whocontinued to ply their trade at the foot of Wall Street as well as innearby cafes. (1985). Many, but not all, ofthe restrictions placed on the type of activities permissible forinvestment and commercial banks were eliminated. Concentration is most oftenmeasured within the context of market share, although it is, at times,measured in the context of aggregate concentration, which may rely onsales, assets, value added, profits, employment, or any of a number ofother indicators as the relevant variable (Waterson, 1985). C. It was in 179 that Alexander Hamilton, as Secretary of theTreasury in the post-Constitution government of the United States,recommended that the new federal government fund all Revolutionary Warbonds issued both by the Continental Congress and the governments of the 13colonies. While an enormousloss was incurred by the bank, his actions were not in the mold of Boesky,Milken, and Leeson. Ivan Boesky and Michael Milken both were convicted on criminal chargesconnected with their investment banking activities. Discountbrokers have made steady inroads since that time; however, their progressis nothing approaching the rapid inroads being made today by the onlinediscount brokers (Spiro & Baig, 1999).Ethical High profile instances insider trading, so-called rogue trading, andother illegal activities occurring in the financial markets frequentlyraise questions about why or how such actions take place. (Ed.). The major operational functions of investment bankingfirms generally are underwriting, dealing, brokerage, and the provision offinancial advice (Pugel & White, 1985). Spiro and Baig (1999), writing in Business Week, estimated that upto 4 percent of online brokers possess only a minimal knowledge ofsecurities brokerage. Of these functions, brokerage andthe provision financial advice apply to the operation or retail brokeragefirms. Leeson engaged in rogue trading onthe currency markets that placed his investment bank employer at greatrisk. On 2 May 1991, the Securities andExchange Commission approved a two-year experiment, during which the NewYork Stock Exchange remained open beyond its normal 4P.M. The financial threat involving reduced commissions has caused somefull-service brokers to begin offering low cost trades to compete head-to-head with the online brokers. Vinzant, C. Similarly, in the contemporary period, the misleading of new onlineinvestors about the risks involved in investing in financial securitiesappears more of an orchestration by the leaders of online brokerages thanbehaviors on the part of some individual account representatives. Cambridge, England:Cambridge University Press. Most of the charges against him were not pressed bythe federal prosecutors in return for Boesky's cooperation in federal casesagainst other Wall Street players accused of corruption. (1999, October 1). Rather, manyof these challenges are to the industry per se. He does have a strong fan club, however, in the officeof the federal attorney in New York City (Riley, 1989; Smilon, 1989). This strategy is a step in the rightdirection; however, trading also will need to be made more convenient ifthe strategy is to work. Trust & Investments, 1-9. The British government, as a part of an effort to fund itsnational debt, promoted public confidence in the English South Sea Companyand encouraged holders of state annuities to exchange them for shares inthe company. A fewonline brokers have implemented a strategy requiring higher margins fordaytraders (Levinsohn, 1999). Eventually, however, informal trading in companyshares was renewed in the coffee houses in the City of London, thefinancial and trading center located within metropolitan London. Boesky requesting to do work at foodbank. The auction market dealtextensively in commodities, particularly wheat and tobacco. (1997, February 22). Boesky can sing but he can't fly. It was noted in the introductionto this research that, as is true for many industries in the contemporaryperiod, the retail segment of the investment banking business finds itselfin the midst of a major transition in the way in which the industryconducts its business. Where tradingeventually will occur if not in exchanges is a somewhat hazy speculation atpresent (Vinzant, 1999). When Leeson stumbled,however, the investment bank, Barings, rolled over dead (Cornford, 1996).Iguchi's case was quite different. The trading offinancial securities was slowly introduced into the auction market. In Walter, I. Retail Brokerage Industry: An Analysis Introduction This research develops an analysis of the retail financial securitiesbrokerage industry in the United States. N., & Baig, E. By February 1997, that proportion had risen to 43 percent("Short Cuts," 1997). Boesky pleaded guiltyin 1987 to a single securities fraud charge connected with his insidertrading activities. Do we need a stock exchange? The daytrader issue raisesquestions concerning the ethics of enticement and facilitation by onlinebrokers of actions by inexperienced daytraders that may cost them dearly.A review of the television advertising that bombards listeners with theadvantages and riches that are available through online trading nevermentions the concept of risk in any serious context. Information technology, of course, also has made online tradingfeasible. That level of ownership meant that approximately one of everythree Americans over the age of 19 years old at that time owned financialsecurities. Inside out: An insider's account of Wall Street.New York: G. Online brokerage, the new coreaccount? P. Spiro, L. In the first session (one-hour), buy and sell orderscould be executed at the closing price only. Putnam, Lovell, de Guardiola, & Thornton, Weschler Ross & Partners.(1999, April 26). Today, inJanuary 2 , the speculation is not that further concentration will occurin the retail brokerage industry (at least not in the near term). The online brokerage industry. Economic Theory of Industry. Mutual Fund Cafe, 1-13.http://www.mfcafe.com/pantry/bps_ 42699. Business Challenges The retail brokerage industry faces challenges in many areas.Further, many of these challenges are not just to full-service brokers whomay be responding only slowly if at all to such challenges. In October 1999, however, the Administration and theCongress worked out an agreement that effectively deregulated the financialservices industry in the United States; thereby allowing commercial banksand investment banks to engage in both sides of the banking business,allowing, with few restrictions, banks and insurance companies to engage incrossover business operations, and allowing mega mergers in the financialservices industry. The investor in such circumstances would beat the mercy of the bookie/broker. References Cornford, A. Such anoutcome, should it come to pass, likely would be good for the retailbrokerage industry, as a variety of brokerage services would be availableto investors, and as the potential for the preservation of the marketmakers would be enhanced. While theMerrill Lynch (single-firm) market share dropped subsequent to 1987, thethree-firm market share continued to climb, reaching 77.9 percent in 1991.Prior to 1987, the highest three-firm market share was 52 percent in the1947-1949 period. A., & White, L. Subsequent to 1987, the five-firm market share remainedin excess of 92 percent, and the 1 -firm market share as remained in excessof 98 percent. Those full-service brokers who remain in thebusiness likely will serve primarily wealthy customers, while the onlinebrokers will serve the cost-conscious lower income investors. R. Eastern Timeclosing. Perhaps, however, the sky will not falland the securities markets will never be without market makers. Further, the continuing advances in information technologyappears to be shifting financial securities trading away not just fromexchange floors but, rather, from the exchanges themselves. The culture of investment banking, however, allowed his behavior tocontinue because he appeared to be on a roll. Newark Star-Ledger, B1. Both the New York StockExchange and the NASDAQ deferred decisions in late-1999 on extended tradinghours. The outcome of this demand was the Buttonwood Tree Agreementin 1792 that created the New York Stock Exchange. A real possibility exists, however, that avirtual curb at the foot of Wall Street is developing (metaphoricallyspeaking). The answer to the research question appears to be "yes," with aqualification. Boesky picked bargains on Wall Street"by using information leaked by investment bankers and attorneys regardingpossible takeover of certain companies" (Perone, 1987, p. Online traders, however, do not flirt; they just do it, a laNancy Reagan. The First Bank of the United States was chartered in 1791, and publicinterest in the shares in this bank motivated another increase insecurities trading in the United States. As the line in the play goes, however, "A funny thing happened on theway to the forum." What happened was the internet, the proliferation ofpersonal computers in American households, and the ability of just aboutanyone to set themselves up as an online broker regardless of how much orhow little they know about financial securities or the securities tradingmarket. Polishing Michael Milken's image. Nicholas Leeson and Toshihide Iguchi are representatives of a latergenre of investment banking employees who play fast and loose with therules and with other people's money. The research question that was investigated throughthe conduct of this research was as follows: Will retail financialsecurities brokerage survive past 2 1 ? 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