Securities Markets

Improvements in internet technology have made it possible for investors to research, analyze, and trade securities online. Today almost all brokerage firms offer online trading capabilities. Online brokerages are popular with "do-it-yourself" investors who choose their own stocks and don't want to pay a full-service broker for these services. Lower transaction costs are a major benefit. Fees at online brokerages range from about $4.95 to $8.00, depending on the number of trades a client makes and the size of a client's account. Although there are many online brokerage firms, the four largest – Charles Schwab, Fidelity, TD Ameritrade, and E*Trade – account for more than 80 percent of all trading volume and trillions in assets in customer accounts.

The internet also offers investors access to a wealth of investment information.

Competition Causes Online Fees to Drop

With the U.S. stock market reaching an all-time high in 2017, private investors continue to look for ways to get in or stay in the market without paying exorbitant fees to execute their own trades. Historically, fees associated with buying and selling stocks have been high and considered one reason why investors sought alternatives via online trading platforms offered by firms such as Fidelity, Charles Schwab, TD Ameritrade, and E*Trade. With advances in technology, including the use of artificial intelligence, the costs associated with handling stock trades has dropped dramatically over the last decade, and investors are looking for the best possible deal.

With competition from companies such as Robinhood, a start-up app that offers $0 fees for stock trades, online trading firms have rushed to reduce their fees to attract more overall business, and a price war has ensued. Fidelity and Charles Schwab lowered their fees for online stock and exchange-traded funds to $4.95; Ameritrade and E*Trade reduced their fees from $9.99 to $6.95.

So how will these firms continue to make money? They believe that lowering the price of entry for trading stocks will allow them to "sweep up" customer assets – meaning firms have an opportunity to attract new customers who not only will take advantage of low trading fees but will be interested in other financial products offered by these investment companies. Some of the other services being touted by online trading firms include loaning money to investors to buy stock and cross-selling customers on wealth management services and other investment products.

According to some industry analysts, one downside to matching competitors' low fees could be a strategy of consolidation within the online trading industry. Unless firms can increase their overall business by reaching out to current customers and potential ones, some may be forced to join up with competitors.

Critical Thinking Questions

1. From a business standpoint, do you think the “almost-free” trading fees make sense? Explain.
2. What can online trading firms do to increase their overall business, particularly when it comes to attracting new investors?