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HISTORY: 1992–2002 281Cramer (2002) notes the changed “economics of the
business”:In the old days, as your broker, I could execute
buy and sell orders for you and charge you a rate
per share that could amount to as much as 25
cents on small dollar shares and as much as $1 or
even $2 per share on larger amounts. If I courted
you on, say, Kimberly–Clark and provided you
with research and guidance about why I thought
it was an appropriate time to buy the stock,
and I enticed you to buy 5,000 shares at $65, I
might be able to charge as much as $2,500 or
$5,000 in commission.... Butthat game’s dead
now, slaughtered by the Net and all of those folks
who charge $6 a trade!Comparing the brokerage market to the book market,
where Barnes & Noble and Borders were being cornered
by an online start-up from Seattle, wits prophesied that
the “brick and mortar” securities firms soon would be
“Amazon’d.”Snagging the World and His Brother in the Web
“Charlotte is fierce, brutal, scheming,
bloodthirsty—everything I don’t like. How
can I learn to like her, even though she is pretty
and, of course, clever?” (Charlotte’s Web, 41)As private investors achieved revolutionary access to the
financial markets, their interest was reinforced by a media
frenzy about the “long boom” of the 1990s and the growth
of the “new economy.” Market indicators and stock prices
were reported and followed as enthusiastically as football
scores in the final months before the Super Bowl. Even
people who had never invested before began to participate
in this sport.
Grass-roots participation in the equities market, com-
bined with increased speed of execution, has been cited
as causing greater volatility in stock prices and reduced
holding periods during the late 1990s. In an analysis of
online investor data in 2000, Roper Starch Worldwide
found that the average online investor traded 12.7 times a
year, with Ameritrade customers averaging 14.5 trades a
year. Ameritrade itself, after examining its customer files
purged of data from day-trading accounts, concluded that
its customers tended to respond to short-term changes in
the market.
In early 1998, Charles Schwab addressed the newly
massive demand for online trading and defended its own
historic positioning of value-added services at a discount
by consolidating its online products into one. This prod-
uct, http://www.CharlesSchwab.com, provided full access to
Schwab research, customer service, and all communica-
tions channels for $29.95 a trade. The company also in-
vested heavily in technology to be able to handle heavier
traffic and to ensure speedy, accurate, and secure order-
processing. Although the firm initially lost money and its
stock price declined with the new strategy, it more than
made up the difference in new customers acquired, in-
creased trading volume among existing customers, and
Internet operating efficiencies. Over the next two years,Schwab’s growth, results, and market value justified the
risks it took. By the end of 1999, wits were no longer
talking about Barnes & Noble being “Amazon’d,” but of
E*Trade being “Schwabbed.”
Meanwhile, traditional full-service brokers did not nec-
essarily respond well to the challenge, fearing cannibal-
ization of their high-fee services. Although some, such as
Morgan Stanley Dean Witter, were relatively early to adopt
the new distribution channel by investing in or partner-
ing with online pure-plays and ECNs, some full-service
brokers saw only the threat e-finance offered to their
traditional ways of doing business. As Internet discount
brokers increasingly took market share from the full-
service firms, the greatest Luddite was the retail leader,
Merrill Lynch. John L. Steffens, Merrill’s head of retail
brokerage, notoriously said in June of 1998, “The do-it-
yourself model of investing, centered on Internet trading,
should be regarded as a serious threat to Americans’ finan-
cial lives.” By the following winter, however, Merrill had
spun its first tentative strands of “do-it-yourself investing”
by offering a 4-month trial of free access to its global stock
research on http://www.askmerrill.com. On June 1, 1999, it un-
veiled a totally redesigned strategy and announced a new
multichannel vision for the firm. As Mr. Steffens himself
characterized the firm’s new position, “We have moved
forward like a bullet train and it is our competitors that
are scrambling not to get run over.” Online trading had
become mainstream.Crash and Burn?
“You lack two things needed for spinning a
web...
“You lack a set of spinnerets, and you lack
know-how.”
(Charlotte’s Web, pp. 58, 60)Securities markets became increasingly shaky in the win-
ter of 2000, and the instability culminated with a plunge
in Nasdaq on April 14 that heralded the bursting of the
Internet bubble. Suddenly, after the Nasdaq plunge, “do-
it-yourself” investing did not appear as attractive as it
had previously, especially to the relatively novice investors
who had gotten into the market in the late 1990s. Issues
of trust arose that undermined confidence in the qual-
ity of information provided by professionals and fellow
amateurs alike. The widely quoted stock analysts of the
dot-com boom were found to have had conflicts of inter-
est after all, originating in their firms’ desires to attract
investment banking business from the same corporations
whose potential the analysts were evaluating. “Commu-
nity members” in finance forums were equally suspect:
information derived from these sources could turn out
to be anything from shared ignorance to outright fraud.
In one notorious case, a 15-year-old New Jersey boy was
caught artificially inflating the value of stocks he had pur-
chased by posing as a knowledgeable adult and praising
them in online chat rooms—a vivid demonstration of how
easy it was to run a such a scam on the anonymous Web
(Lewis, 2001).
Securities trading volume dropped by about 30%
in 2000–2001, with the discount and deep discount