Aug. 18, 1996

Keying in on online trading
More investors are choosing to bypass brokers and buy, sell stocks from their own personal computers

by Richard Buck
Seattle Times business reporter

Several evenings every week, Michael Develle signs on to his home computer and uses it to place orders to buy and sell stocks for his retirement account and the two investment clubs where he serves as treasurer.

Develle, a Boeing engineer, is part of a tiny but rapidly growing niche of investors who use their personal computers to bypass the traditional telephone call to a broker.

"I trade at least three times a week, and always in the evening," said Develle. "I never have to talk to a broker, never have to deal with anyone on the phone or get caught in voice-mail hell. It is so convenient that I don't know why everybody is not doing this."

More than a dozen discount brokerages now allow customers to buy and sell stocks, bonds, mutual funds and sometimes options electronically, and more will likely follow.

Online trading is akin to depositing your paycheck in a bank at an automatic teller machine instead of handing it to a teller. The main difference is in whether you or the teller punch in the numbers that tell the bank's computer what you are doing.

When you decide to buy or sell 100 shares of Boeing stock, you normally pick up a phone, dial your broker's office and place your order. Your broker then punches numbers on a keyboard to enter the trade. Within three business days, you must pay for the stock (if you're buying) or turn over the stock certificate to the broker (if you're selling).

With online trading, the only difference is you don't talk to a broker and you enter all the information on your own keyboard. Typically you will get a phone call soon after the trade is made telling you how much to pay. Some brokerages require online investors to have part or all of the cash to pay for an online purchase in their accounts before transactions are accepted.

Ways to trade

There are three basic ways to do electronic trading: Some brokerages give their customers proprietary software developed for use only by that brokerage's customers. The software instructs the customer's computer modem to dial a direct phone connection to the broker. Other brokerages operate over online services such as America Online and CompuServe. Still others have World Wide Web pages that are accessible directly without unusual software or an online service. Some brokerages offer all three options, some two, some only one.

Typical of many discounters, Savoy Discount Brokerage in Seattle has developed a proprietary Windows software program that lets its customers access their accounts and make trades via a direct phone link to Savoy. This is considered the most secure type of connection because all information passes directly from your computer to the brokerage's computer.

To use brokerages that operate through online services such as CompuServe, you don't need special software, but you must pay the regular fees for the online service. The method is considered somewhat less secure than using direct phone connections and proprietary software because information on your account must pass through the online service's computer on its way to the brokerage.

The newest and fastest-growing form of online trading is done directly on the Internet. By using a World Wide Web browser such as Mosaic, Netscape Navigator or Microsoft Explorer, you can access your broker's Web page to get stock quotes, look up your account information and enter trades.

With this method, security remains a strong concern. Develle does his online trading with JB Oxford, a discount brokerage in Beverly Hills, Calif. Although the company just started offering Internet trading through its World Wide Web page, Develle, a part-time computer consultant, prefers to use the company's proprietary software and a direct phone connection.

"As far as I am concerned, Internet security is still under construction," Develle said. "It's too unproven for me. The hackers are too good." He and others fear that because the Internet is open to computer users around the world, somebody might be able to intercept account information, passwords and account balances and even place unauthorized buy and sell orders.

Advantages

For Develle and others who are accustomed to doing a growing variety of tasks on their computers, online trading offers three main advantages: price, convenience and the fun of finding a new way to accomplish what can seem like a mundane chore.

-- Price: Develle pays an average of $20 per tradeat JB Oxford. That's less than what even the deepest discounters normally charge for trades handled by telephone. Online commissions go much lower. One Internet discounter, eBroker, charges only $12 per trade.

-- Convenience: Many individual investors have discovered that there's a wealth of information on stocks, bonds and mutual funds on the Internet. "Now that the prices for service are so cheap, a lot of people just reside on the Internet, and they sort of park there," said Paul Goodrich, an attorney and co-founder of Savoy. "It's extremely easy to just hop to another page for doing the trading without having to sign off the Internet and dial up some direct line."

-- Fun: Though the "fun" element of Internet trading can't be reduced to numbers, it helps attract computer-literate investors who like to be among the pioneers of new technology applications.

"I know I'd have better results if I turned my money over to a professional manager," said Develle, whose accounts total in six figures. "But I've been doing this about eight months, and I'm just having too much fun."

Disadvantages

Nevertheless, online trading is not all fun and games. Any financial account or relationship can run into glitches, and customers may yearn for a person to talk to.

Develle said he has never had a problem getting his trades properly executed. If he had a problem or a question, JB Oxford has customer-service representatives available by telephone during normal business hours. But not all electronic brokerages do.

Some with the lowest prices, in fact, discourage human contact, leaving customers to rely on e-mail to straighten out any problems.

Investors also usually need research on which to base their buying and selling decisions - research that's usually not available from deep discount brokerages. For most online investors, who are apt to be independent, resourceful and adept at surfing the World Wide Web and combing other sources for what they need, that's not likely to be a major problem.

"For the person who is PC-focused, online trading is incredibly attractive," said David Risher, a product unit manager in Microsoft's Desktop Finance Division. "But that is a relatively small group of people."

Figures are hard to come by, but some researchers say about one of every 100 brokerage accounts offers online trading as an option. However, those accounts tend to be far more active than average, and some experts say online trading may account for nearly 5 percent of all stock-market trades.

Beyond security questions, one impediment to Internet trading is the cost of developing software.

"We want a first-class product for Internet trading when we do it," said Goodrich, at Savoy. "It takes a very significant financial investment to offer a first-class system."

That's where Microsoft hopes to step into the picture.

Microsoft program in the works

The world's largest software company, already heavily committed to creating content for the World Wide Web, is working on a program to let investors track and view several brokerage accounts simultaneously, much as its Money and Intuit's Quicken let consumers track bank and credit accounts.

"Most of the customers we talk to have multiple brokerage accounts, and Microsoft can add value by creating a standard way to look at those accounts," whether they are traded through direct online connections, through online services such as CompuServe and America Online, or through the World Wide Web, said Risher.

"We are working with brokerage and other content partners," Risher said. "We can't do any of this sort of thing alone. Microsoft is not a brokerage and won't be a brokerage, but we hope to create a bundle of services that includes online trading that brokerages provide. We would allow the customer to get some information to help them figure out what to buy."

Even Microsoft knows it will be a big job to change the trading habits of millions of individual investors used to calling their brokers.

"If all you want to do is buy 100 shares or sell 100 shares, it's hard to imagine why you would want to turn your PC on," Risher said. "Our job is to make it obvious why."

Risher won't say when Microsoft will introduce its product except that it will be "in the coming months up through next year."

Options available

One of the leaders in online trading is E # Trade, a company established in Palo Alto, Calif., in 1983 to handle trades electronically for discount brokers. Four years ago, the company, in effect, went into competition with those brokers by offering its service directly to investors via CompuServe and America Online. Last winter, the company opened a World Wide Web page. E # Trade charges $14.95 per trade for stocks listed on a stock exchange and bought or sold at the market price, and $19.95 for other trades.

Two giants of the discount-brokerage industry, Fidelity Investments and Charles Schwab, offer online trading but at significantly higher commissions (at least twice JB Oxford's $20) that vary according to a stock's price and the number of shares. But Schwab and Fidelity's commissions are lower for customers who trade online instead of by phone.

Schwab offers trading through proprietary software and Internet access. Fidelity offers only direct online trading through its own software, though it has a World Wide Web site that offers investor information.

Although today's online trading options may seem radical for the brokerage industry, the Internet could spawn much bigger changes.

Andrew Klein of Wit Capital in New York hopes to open a discount brokerage house next winter that will bypass not only traditional brokers but stock exchanges themselves.

Klein's clients will be able to sign on to the company's Internet site, not yet established, and enter buy and sell orders into an electronic system that will match orders sort of like a giant swap meet. The service also will be available through push-button telephones, Klein said.

Klein's company will charge competitive commission rates, he said, but will usually provide better prices to both seller and buyer because market makers - dealers always ready to buy or sell a stock at publicly announced prices - and their markups will be eliminated.

Because those markups, which can amount to 30 cents or more per share of stock, are eliminated, "On our page, you'll see the best price available in our electronic market, and the vast majority of the time that will be a better price" than the publicly quoted price of the stock, Klein said.

"This is the ultimate form of disintermediation. It lets people meet each other directly," Klein said. "The Internet is the first thing that allows a truly open system, a digital system that operates like an open book."

Background

Stirling hopes to use Internet for stock offering, interaction with shareholders

Brokerages providing services