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280 SECURITIESTRADING ON THEINTERNETorder to enhance the liquidity they provided, the ECNs
established mutual alliances throughout 1999 and 2000 to
link their order lists and offer access to a broader market
to their customers. In recent years, moreover, the field has
consolidated—partially in response to increased competi-
tion from exchanges and partially due to the bear market
of 2001–2003 and its lower trade volumes.
In an effort to reduce fragmentation and to defend its
competitive position, Nasdaq has developed a voluntary
central limit order book, known as SuperMontage, which
was approved by the SEC in August 2002 and was rolled
out from October 14 to December 2, 2002. Many ECNs
balked at the fees Nasdaq charged as well as the compet-
itive advantage it might have gained with the system, in
which investor subscribers are notified of the best orders
placed by the exchange’s market-makers and any partici-
pating ECNs. Postings include both bid or asked price and
the size of the offer, a piece of information that may hint
at market movement. As part of its implementation, how-
ever, participants in SuperMontage give up anonymity, so
users are able to infer what the big securities firms think
of given stocks.
The ECNs have had a profound effect on traditional
stock markets in the United States, forcing them to exam-
ine their marketing strategies and increase the value they
add for customers. This has included upgrading technol-
ogy significantly so that they can provide quicker order
execution, enhancing the information provided to cus-
tomers, and—due to competitive pressures—compressing
the price spreads on securities trades. “Decimalization”—
quoting prices in hundredths of a dollar instead of
eighths—is one aspect of the efforts to narrow the in-
crements among potential prices cited. In addition, ex-
changes that were formed as nonprofit associations have
found that they cannot respond with enough flexibility
to counter new competitive threats and are moving to
“demutualize” and reconstitute themselves as for-profit
corporations. Much of the recent revision is concentrated
to the U.S.; European markets went through radical inno-
vations that included computerization, demutualization.
and collaboration in the 1980s in preparation for the eco-
nomic unification that culminated with the adoption of a
common currency (the euro).Regulatory Bodies
Governments played a vital role in the growth of e-finance;
they established the rules by which participants spun the
web and defined the kinds of strands that would be al-
lowed. The U.S. government was an early participant in
applying technology to the securities industry by creat-
ing the initial EDGAR (Electronic Data, Gathering, Anal-
ysis and Retrieval System) registry in 1984, allowing firms
to submit financial disclosure documents on computer
disks. EDGAR was taken online in 1995, making detailed
financial documents readily available on the Web. More-
over, the SEC’s order handling rules of 1997 laid the
foundation for the growth of ECNs, and later regulations
opened the door for ECNs to apply for exchange status, es-
tablished registration requirements for securities traded
online (that is, how non-U.S. firms can qualify their Web-
based offering to be exempted from registration with the
SEC), and developed procedures that allowed companiesto register and sell stock offerings online while bypassing
underwriters (and their costs).How the Web Was Spun
The First Strands: Discount Brokers and “Pure-Plays”
“Well,” said Mr. Zuckerman, “it seems to me
you’re a little off. It seems to me we have no or-
dinaryspider.” (Charlotte’s Web, 80)Early entries into the field of online stock brokerage
were the discount brokerages and deep-discount bro-
kerages that emerged from industry deregulation in the
1970s. Charles Schwab launched its first computer-based
product in 1985, enabling customers to dial directly into
Schwab’s computer system via PC modem. E.Schwab,
which was launched in 1995, was very similar to this ser-
vice, still employing a proprietary telephone line to access
the Schwab computer system.
Ameritrade, a pioneer in brick and mortar deep dis-
count brokerage, was the first firm to automate con-
sumers’ trading in 1988 when it offered a touch-tone
phone interface—Schwab followed in 1989—and a firm
that Ameritrade later acquired (K. Aufhauser & Company)
was the first to offer true Internet trading in 1994.
The first “pure-play” online brokerage—employing
only the Internet for consumer trading—was E*Trade.
The firm became a retail brokerage when it redirected its
services from back-office online processing for discount
brokers (begun in 1992) to direct-to-consumer market-
ing under its own brand. By 1995, commissions on con-
sumer trades made up over 80% of E*Trade’s revenue. Its
long-term goal was to “become America’s dominant deep-
discount brokerage firm by fully automating the front and
back-office trade processing function and maintaining its
position as the low-cost provider” (Lal, 1996, p. 2). From
1995 to 1996, E*Trade gradually but steadily dropped its
per-trade commission from $24.95 to $14.95 by exploit-
ing its technological efficiencies. In January, 1996, it in-
vested heavily in advertising to launch a redesigned Web
site, gain brand awareness, and attract customers by posi-
tioning itself as a market innovator and technology leader
with a cut-rate price. The next month, the company’s ad-
vertising message evolved to differentiate itself from other
deep-discounters by stressing newly added products and
services: 24-hour access, free quotes, online portfolio
management, free checking, and margin and I.R.A. ac-
counts. As a result of this aggressive promotion, E∗Trade
was able to position itself among investors as the leading
Internet broker.
In response to incursions by E*Trade and its ilk on its
market share, Charles Schwab enhanced its still-limited
e.Schwab service and reduced its commission to $29.95.
It also increased the commission discount for its top-
tier product from 10 to 20% off full-service retail. Cus-
tomers and prospective customers responded positively,
but as 1997 advanced, the price war among E*Trade,
Ameritrade, and other deep-discounters escalated with
no floor price in sight. (By 2000, some firms even ex-
perimented with free trading services.) Discussing the
2002 move by full-service brokerage houses to reject
“small” clients with “only” $300,000–$400,000 to invest,