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HISTORY: 1992–2002 279popular belief that such community activity impacted the
securities markets, the authors theorized that their influ-
ence might be due to the disclosure of new information,
the reflection of market sentiment, investors’ susceptibil-
ity to influence by posted messages, day traders’ usage
of the discussions to plumb market momentum, and con-
sciously fraudulent efforts to manipulate the market. They
found that message board discussions could be associated
with short-term movement of the stocks under discus-
sion, at least for companies in the fast-moving Internet
sector, where investors could be expected to be especially
vigilant. The scholars analyzed 181,633 messages taken
from RagingBull.com. The 10,723 unique ticker–day com-
binations represented 24.1% short-term opinions and
20.8% long-term opinions. “Abnormal” stock returns for
the securities discussed were defined as deviations from
the Philadelphia Stock Exchange (PSE) Internet Index,
and short-term abnormal returns were found to be corre-
lated with—but not necessarily caused by—high levels of
message board activity.Online Stock Brokers
With the rise of the commercial Internet and the World
Wide Web, technologically oriented entrepreneurs saw the
potential benefits of online trading and launched an in-
dustry that was estimated to have captured 25% of all
U.S. stock trades in 1999. Working on either a “discount”
or a “deep discount” model, the earliest online brokers
were “pure plays”—that is, they used the Web as their
only channel of distribution to retail customers. As the
1990s ended and the dot-com bubble collapsed, the ben-
efits of consolidation, multichannel distribution, and en-
riched client service became evident. Table 2 lists the top
brokerage houses, in terms of theironlinerevenues (i.e.,
excluding all other revenue) as of November 2001 and
trading fees and services as of 2002. Table 3 ranks the top
U.S. brokerages houses in terms of the “effectiveness” of
their online offerings. The rise and stumble of online bro-
kerage services will be detailed below.Electronic Communications Networks
(ECNs) and Stock Exchanges
Instinet, the earliest ECN, was founded in 1969 to en-
able institutional investors to match their large blocks of
stocks directly and bypass “market makers” such as the
specialists on the New York Stock Exchange (NYSE) or
the dealers of Nasdaq. In 1997, the SEC imposed new
regulations, called order handling rules, that required
exchanges to display investors’ limit orders, opening up
opportunities for individual retail investors to use ECNs
via their brokers. Whereas the NYSE’s Rule 390 (since
rescinded) limited stocks listed on the “Big Board” to trad-
ing on organized exchanges, Nasdaq imposed no such re-
quirement. Nasdaq investors and broker/dealers were free
to exploit the advantages of ECNs: low transaction fees
(as low as $0.00035 per share), narrower price spreads
(leading to lower purchase prices and higher sales prices),
quicker execution than floor-based or screen-based sys-
tems (a fraction of a second versus half a minute or more),
anonymity that offers the retail buyer the same alter-
natives as a large institution, and—by 1999—after-hours
trading. ECNs, therefore, thrived on Nasdaq and by theTable 3Top U.S. Brokerage Firms, Ranked by
Composite Rating of Online Effectiveness
(CORE) Index,∗2002 Overall Index1E∗Trade 100
2 TD Waterhouse 100
3 ShareBuilder 82
4 Fidelity 80
5 Ameritrade 72
6 Charles Schwab 72
7 Datek 61
8 Merrill Lynch 61
9 CSFBdirect 57
10 Vanguard 48
11 American Funds 45
12 Buy and Hold 42
13 Edward Jones 40
14 American Century 40
15 Putnam Investments 34
16 PRUFN.com 29
17 T. Rowe Price 27
18 Janus 26
19 Scottrade 0.0*The Jupiter Research CORE Index is made up of
individual scores relating to number of unique visitors,
usage intensity (amount of time spent), usage frequency
(number of visits per month) and customer loyalty or
transition (the ability to migrate off-line customers online;
financial institutions that achieve the highest combination
of consumers’ attention, unique visitors’ traffic and online
transition of their total customer base will attain the
highest level in the CORE ranking system.
Source: Jupiter Research, March 2002. eMarketer, Inc.©c
2002 (http://www.eMarketer.com)first quarter of 2002 processed over 50% of Nasdaq trades
(see Figure 3). Of nine ECNs founded in the past 5 years,
Island was the first and remains the largest; it agreed to
merge with Instinet on September 20, 2002, making their
combined share of Nasdaq stock trading 22%.
ECNs are not without their disadvantages, however.
Early criticism focused on their role in fragmenting the
market, reducing its liquidity by shrinking the pool of
potential buyers or sellers to which a given order was
exposed. The larger the pool, the argument went, the
greater the chance of finding an interested buyer/seller
and getting/paying the best price—in Charlotte’s words:
the larger the web, the more likely it is to catch flies. In0%20%40%60%80%Jan-00Mar-00May-00Jul-00Sep-00Nov-00Jan-01Mar-01May-01Jul-01Sep-01Nov-01Jan-02Mar-02May-02NASDAQ ECNFigure 3: ECN trading volumes as percentages of NASDAQ
trading volume.