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Securities Trading on the InternetSecurities Trading on the Internet
Marcia H. Flicker,Fordham UniversityE-finance and Securities Trading 274
Why E-finance? 274
The Industry’s Perspective 274
The Investor’s Perspective 275
History: 1992–2002 276
Strands of the Web 276How the Web Was Spun 280
Glossary 282
Cross References 284
References 284
Further Reading 285E-FINANCE AND SECURITIES TRADING
I don’t know how the first spider in the early
days of the world happened to think up this
fancy idea of spinning a web, but she did, and
it was clever of her, too....It’s not a bad pitch,
on the whole. (Charlotte’s Web[White, 1980],
pp. 39–40)Participants and observers in Wall Street’s online finan-
cial web have used the term “e-finance” to name a vari-
ety of digital network technology applications—primarily
using the Internet—that have transformed the personal
and institutional financial markets. It has been applied
to the banking, insurance, and securities industries and
even to processes such as risk management in corpo-
rate finance. This chapter concentrates on online security
trading and online financial services, and in this chapter,
“e-finance” will refer “only” to Internet-enabled activi-
ties involved in the buying and selling of stocks, bonds,
financial derivatives, and mutual funds. These activi-
ties include online investment planning, management,
and trading; computerized securities exchanges; online
registration of new equity offerings; and the explosion
of information newly available to investors—both from
commercial sources and from other investors in mes-
sage boards and chat rooms. Other chapters in the
Encyclopediadiscuss online banking, electronic funds
transfer, and electronic payment systems. (See Figure 1.)
With the “New Economy bubble” spinning a sup-
portive web of capital from 1995 to 2000, the field of
financial securities was transformed from one that relied
on person-to-person direct communication to one that
exploited the potential size, speed, and collaboration of
computer networks. Technology enhanced and expedited
traditional investment processes and bred new capabili-
ties that would have been unthinkable before the World
Wide Web was built.WHY E-FINANCE?
The Industry’s Perspective
I have to get my own living, I live by my
wits. I have to be sharp and clever, lest I go
hungry. I have to think things out, catch what
I can, take what comes...”(Charlotte’s Web,
p. 40)“What comes” was more than the flies and insects Char-
lotte caught in her web. Three factors led businesses and
governments to adopt the Internet as a distribution chan-
nel for financial services. The first two were unalloyed ad-
vantages, the third a mixed blessing:A rapidly expanding potential market of predominantly
affluent Internet users
An extremely efficient supply model for distributing infor-
mation digitally
Potentially risky investments in technology infrastruc-
tures and common standards.Potential Market
The population of Internet users has grown exponentially
since the United States government released constraints
on commercial applications in 1991 and user-friendly Web
browsers become available in 1994. Although early users
were few, they formed an attractive market segment for
the financial community: comparatively affluent and in-
novative, and concentrated in developed and technology-
rich economies such as the U.S., Canada, Northern
Europe, and Australia. As the 1990s passed, the online
population grew more mainstream in North America and
spread to inhabitants of the developing and non-English-
speaking world. According toThe UCLA Internet Report
2002—“Surveying the Digital Future” (UCLA Center for
Communication Policy, 2003), 71.1% of Americans used
the Internet in 2002, whereas 47.0% of those who did not
go online anticipated doing so within 12 months (pp. 18,
30). The racial and educational “digital divide” in Inter-
net access that existed throughout the 1990s has largely
disappeared; an income divide remains, both within de-
veloped economies and between affluent nations and their
less affluent counterparts.
For those with access to the Net, time spent online has
grown as additional products and services enhanced the
utility of the Web and as surfers’ experience of it deepened
and matured. Years of online experience have proven to
be a significant predictor of online commerce in all forms,
and e-finance is no exception.The UCLA Internet Report—
Year Threefound that the average Internet user spent
11.1 hours a week online in 2002. For those with 5 years
or more experience of the Web, 3.9% of that time was de-
voted to trading stocks, whereas those with less than a
year of experience spent 2.8% of their online sessions on274