Invetment Essay Example For Students

Invetment Essay â€Å"What regulatory issues does the brokerage industry face with respect to the retail investor and the advent of online securities trading?†The number of securities trades conducted online has taken a dramatic increase in recent years, rising from under 100,000 trades per day in 1996 to over half a million in 19991. The SEC (Securities and Exchange Commission) expects the level of online brokerage assets to rise to $3 trillion dollars by the year 2003, from a meager $415 billion in 19981. The appeal is that the Internet provides â€Å"real time† stock quotes, previously available only to brokers and their firms, in addition to a wealth of information on just about every company that is publicly traded. A new breed of investment firm has been born, conducting its business solely on the World Wide Web, and the average fee charged by one of these companies is now only $15.75 per trade , a fraction of the cost at a full-service firm. Online trading has given rise to a gr eater frequency of trades as well. While online traders only currently represent about 10 percent of the market, they tend to trade two to three times as often, making up approximately 30 percent of all trades, up from 17 percent in 1997 . Many people have given up their jobs to become full time traders, with mixed success. In fact almost all day traders lose money, and the recent market turmoil has left many gasping for breath. In its new form as the â€Å"Online† brokerage firm, the business is still flourishing. Despite being forced to lower their commissions and advertise more to attract new business, they are managing to adapt. DLJ Direct, for example, has posted an 82 percent increase in revenues from 1998 to 1999 , and as of July 1, 1999, online transactions accounted for 52 percent of all trades at broker Charles Schwab . With the general trend of the market moving towards computerized trading, the brokerage industry is being forced to evolve as well. Due to the high volume of trades conducted via the World Wide Web, several problems have been encountered regarding both the application of current trading laws to cyberspace and the integrity of internet users with regard to the brokerage industry. The Securities and Exchange Commission has recently published a report concerning on-line brokerage, which attempts to determine what the place of the brokerage firm will be in this Internet scenario, and what measures can be taken to regulate the transactions conducted on the world wide web. Many of the problems encountered with the advent of the Internet are analogous to those in conventional trading, and are addressed by existing laws and regulations. However, the Internet also presents unique situations that will require new methods of surveillance and enforcement by the regulators.First, there is the issue of computer systems: how to ensure that a firm’s system has enough capacity to handle the marked increase in the number of investors that the Internet has generated. Second is a given firm’s obligation to execute a customer’s trade at the best monetary terms readily available(known as the â€Å"Best Execution Responsibility†). Third is the application of the suitability doctrine , which requires a broker to recommend to his/her customer only those investments that are deemed â€Å"suitable† for that individual. Fourth is the general concern over privacy of investor’s personal information, and the ability of a firm to ensure it. Last is the issue of insider trading and fraud, and the regulatory issues concerning these problems. First, there is the issue of systems capacities. In the past, many systems have suffered from things such as delays and outages, causing serious customer concerns over reliability.Firms will be forced to issue disclosure statements regarding the reliability of computer systems, and clients will tend to gravitate to those firms with the most dependable systems, and the systems that can handle the most customers. The SEC Report concludes the following. The Scarlet Letter: Reference to Mirrors Essay1.â€Å"Get financial statements from the company and be able to analyze them;2.Verify the claims about new produce developments or lucrative contracts;3.Call every supplier or customer of the company and ask if they really do business with the company; and4.Check out the people running the company and find out if they’ve ever made money for investors before.† In addition, the SEC is actively prosecuting Internet fraud allegations, and have achieved more that a few indictments. The SEC has been regulating the exchange of securities for many years, and the question they now face is how to impart some form of regulation to the Internet, and when. At what point does the World Wide Web rise above the floor of the stock exchange in sheer volume of trades, and is it wise to wait until then? These are questions that have yet to be answered. As for the Wall Street brokerage firm, it has already begun to evolve with the Internet, and will most likely continue to change for some time yet. Although the change in the markets will reduce the need for such positions as stock brokers and exchange floor clerks, among others, the economy tends to create jobs where they are needed. There will be even more need, for instance, for computer support people, systems analysts, researchers, and many others. Additionally, regulators will be forced to adapt to the changing face of the securities markets, and laws specifically tailored to the Internet may very well be required. ABCNEWS.com: SEC Examines Online Trading, Adine, Lynne, â€Å"Online Trading Exploding: SEC Releases First Report on E-Trading†. http://more.abcnews.go.com/sections/business/dailynews/adrine_sec991122.html. Bryan-Low, Cassel. â€Å"Web Brokers Begin to Offer No-Commission Stock Trades.† Wall Street Journal 19 June 2000: C1â€Å"Boom in Online Trading Leveled Off, Study Says.† Wall Street Journal 15 June 2000: C24DLJ Press Releases, Third Quarter 1999 Financial Statement. http://www.dlj.com. Elstein, Aaron. â€Å"Online Investing(A Special Report) – The People: The Day Trader – Online Investing Can Be All-Consuming – If You Let It.† Wall Street Journal 12 June 2000: R19Prentice, Robert E. The future of Corporate Disclosure: The Internet, Securities Fraud, and Rule 10b-5. http://www.law.emory.edu/ELJ/volumes/win98/prentice.html. SEC. â€Å"Internet Fraud: How to Avoid Internet Investment Scams†. http://www.sec.gov/consumer/cyberfr.htmSEC. â€Å"Plain Talk About On-line Investing,† speech by SEC Chairman Arthur Levitt at the National Press Club. http://www.sec.gov/news/speeches/spch274.htSEC Litigation Releases, Published by Gleaser LegalWorks. â€Å"Securities Regulation and the Internet†. http://www.cybersecuritieslaw.com/sec_litigation_releases.htm. Securities and Exchange Commission, Special Study: â€Å"On-Line Brokerage: Keeping Apace of Cyberspace†. http://www.sec.gov/news/spstindx.htmSEC. â€Å"Internet Fraud: How to Avoid Internet Investment Scams†. http://www.sec.gov/consumer/cyberfr.htmWang, Andy. MSNBC Press Releases, â€Å"Giving up the day job to trade online†, http://www.msnbc.com. Zuckerman, Gregory. â€Å"Bond Trades Head Online In New Plan.† Wall Street Journal 13June 2000: C1Bibliography: