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THE CUTTING EDGE

Markets and Modems

The Internet is making online trading faster, cheaper and easier than ever

August 05, 1996|JAMES F. PELTZ | TIMES STAFF WRITER

It's one of the hottest trends to hit individual investing in two decades: online trading, in which you can use your personal computer to trade stocks and mutual funds.

Limited forms of online trading have been around for more than 10 years, but they appealed only to a narrow segment of investors. Now, thanks to the widespread growth of the Internet and its World Wide Web, trading stocks in cyberspace is becoming routine in a rapidly growing number of U.S. households.

"I'm not a computer whiz kid, and it's really easy to use," said Tom Juenger, 24, a financial services researcher in Venice who's been trading online for a year.

The number of online brokerage accounts currently exceeds 650,000, a 50% increase since 1994, according to the consulting firm Forrester Research Inc. in Cambridge, Mass. Forrester predicts the number will soar to 1.3 million by 1998.

One fledgling provider of low-cost online trading, E-Trade Securities Inc., is now handling between 8,000 and 10,000 trades per day, more than double its level of six months ago.

To be sure, all of the online activity is still a pittance compared with the volume handled by traditional means, which in recent weeks has topped a combined 800,000 trades per day on the major exchanges and the Nasdaq market.

Online trading also is limited mostly to the discount brokers. The giant full-service firms, such as Merrill Lynch & Co., offer information and data on the Web. But they don't yet offer online trading, because it would preclude the need for the human brokers that are the backbone of the firms' retail operations.

Some firms and investors worry about security--namely, that a hacker could somehow get into personal accounts or otherwise disrupt trades. But those already handling online trades, such as discount brokerage leader Charles Schwab & Co., maintain that no online trading account has yet been breached.

Besides, "you read about brokers getting in trouble every day," Juenger said.

Be advised, though, that some online brokers have suffered glitches on heavy trading days, just as soaring volume has plagued conventional brokers. Online investors have complained that on such occasions, there have been delays in getting accurate prices and in getting their trades executed.

Nevertheless, most experts believe online trading will become as permanent a part of the investment landscape as discount brokers, which took off 21 years ago when trading commissions were deregulated.

"This will be far more than just another tool" for investing, said Art Shaw, Schwab senior vice president for electronic brokerage.

Online trading, in fact, is another step in the evolution of discount brokerage. As with most others who use discount brokers, PC traders buy and sell based largely on their own assumptions and without much assistance from a stockbroker.

Also, online trading takes price discounting even further. Commissions on trades of, say, 100 shares of a $50 stock have been slashed as low as $12 in some cases, because Schwab, E-Trade, Quick & Reilly and others are aggressively vying for the burgeoning online business.

That compares with full-service commissions on a similar trade of $70 or more, and conventional discount-brokerage commissions of $30 and higher. (Keep in mind that rates vary widely among brokers, however.)

Joe Ricketts, chief executive of TransTerra Co., an Omaha-based parent of four small online-trading brokers including eBroker, sees a day within six years when "the Internet will bring the telephone and the PC and the TV into one implement."

"It will deliver all the information they [investors] need, and it will be simple and easy to use," he said.

Some firms are also exploring the idea of using the Web to one day handle exclusive Internet trading in which buyers and sellers would bypass the traditional markets to trade securities directly.

So, what if you want to join the bandwagon? How exactly does online trading work, and how does it differ from the conventional method of using a human broker?

For starters, it helps to think of online trading this way: It's not much different from picking up the telephone and voicing your trade to a broker on the other end. But instead of the broker taking your voice order and punching it into a computer, you do that directly. And it's that increased efficiency in the trading process--eliminating the human intermediary--that enables firms to offer lower commissions for online trades.

There are three main ways to trade using a PC: using specialized software provided by brokerage firms, such as Schwab's StreetSmart; by accessing an online service, such as America Online or CompuServe; or by using the Web.

The software packages are often included with new brokerage customer accounts that require minimum opening balances of $1,000 or more. (The online services will of course charge a fee for their connection, which will be in addition to whatever trading commissions you will pay.)

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