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The History of Online Trading
by Carmelo J. Montalbano
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Overview
The History of Online Trading
The history of online trading is a recent story of the transformation of the securities business. Online trading has reduced the cost of trading and allowed individuals to participate in trading strategies that otherwise would have been cost prohibitive otherwise. In return, individual investors have added liquidity to the marketplace with day trading, option spreads and exchange-traded fund offerings.
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Institutional Beginning of Online Trading
The Reuters news system, designed for institutional traders, marked the beginning of online trading. Begun in 1969, "Instinet" was designed to accommodate large institutional orders both on domestic and international exchanges. It was designed as a private exchange for dealers, mutual funds and other financial intermediaries. It was raw but it worked. Daily volume on the exchanges were quite low in 1969. The New York Stock Exchange volume averaged less than ten million shares per day at that time.
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CompuServe Creates News and Quote Linkage
As a normal extension of its news-gathering service, CompuServe, an early creator of computer content, developed a method to obtain stock and bond news and quotes. The technique CompuServe employed was to parse existing offline versions of its stories and quotes to make it appear that a new news-gathering services was available that could provide near real-time quotes without paying exchange fees. However, retail online trading services were still not available.
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The Introduction of the Internet and Online Trading
With the early widespread use of the Internet came the increased possibility of a universe of traders large enough to populate online brokerage. However, bottlenecks caused from the nascent Internet's slow feeds and lost connections still made the computer an unreliable method of communication. The first trade by an individual online was made in 1983 via the forerunner of E*Trade, then called Trade*Plus. By 1988 trading by touchtone telephone was possible by using broker Accutrade. It now seemed possible and probable that individual investors would trade and research investments on their computers.
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The Dynamics of Internet Trading Come Into Play
Even though major brokerage firms could have created and entered the online trading business, they were not willing to forgo the expensive and profitable trading commission structure of the standard brokerage operation. It was discount brokers--already knowledgeable, cost efficient, computer savvy operators--who were willing to invest in the research and development that led to the trading platforms available today. The increased speed and reliability of computers had continued substantially in the 1990s, which led to a universe of computer-literate investors large enough to support large brokerage firms. The most important change was the market itself. The sustained bull market rally culminating in 2000 had drawn millions of investors into the chase for profits through Internet investing portals.
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The Mature Online Trading Market Today
Online brokerage today is widely accepted by all segments of the investing universe. Every major brokerage makes customer holdings, investment research, and trading platforms available through its own network at prices below that of the standard "offline" broker. In addition, many firms own and offer deeply discounted trading prices through brokerages they own but advertise under different names. Goldman Sachs's ownership of optionsXpress is one example.
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Online Trading is Now Standard Practice
The use of online trading has a generational aspect as well. Fewer young investors see the need to employ the expensive human broker when many resources are available to make their own investment decision. Online trading has moved from an experimental trading system to a mainstream practice.
Research Before Trading
