In the US, while way back in the 1980s broker-dealers were offered the facility to submit their trades through dial-up connections way back in the 1980s. But, when Internet-based trading systems were introduced in 1995, it was an instant success. According to a study conducted by the Securities and Exchange Commission, by 2001 the number of online traders increased to 7.8 million.
However, in between came the year 2000, which was a major dampener as volumes plummeted, thanks to the tech crash. Several online brokerages were forced to shut down, cut workforce and costs. Other problems surfaced as well.
There was a surge in investor complaints related to online trading. The complaints were related to failures or delays in processing of orders, difficulty in accessing customer accounts online and errors in processing of orders. Despite the problems, firms continued to pour money into new online trading ventures.
Another influence of online trading was a sharp reduction in the cost of transactions. For example, American Express Bank is now providing free trading facility to its customers with high balance in their account. However, of late there have been reports of web brokers hiking their commission.
Besides, online trading created a new breed of investors, the day traders who buy and sell on the same day to book profits. There has also been a decrease in the average amount of time a stock is held by an investor, thanks to the ease in trading.
Online trading has also led to an increase in liquidity, with over 75 per cent of the equity of an average listed company changing hands during the previous year. More recently, one of the most significant effects of online trading has been the development of Electronic Communications Networks (ECNs) which may become a threat to the stock exchanges. ECNs are privately organised networks of investors which allow buyers and sellers of securities to post notice of their desire to trade directly to each other, via the network, bypassing stock brokers and traditional stock exchanges completely.
As a result, the transaction costs get drastically reduced to one cent to four cents per share, which may be 99 per cent lower than the cost of trading through a traditional market maker.
So, premier exchanges like Nasdaq and the New York Stock Exchange are working on changing the way they operate, with enhancement in the use of technology and extending their trading hours. A 24-hour trading system is approaching quickly as online capabilities become increasingly ready to facilitate it.
In the backdrop of the active US online trading market, the gaps in the Indian system appear more glaring. In India, the major issue is that of a big time lag between placing the order and its execution. The time lag may be as high as 5-10 minutes. The high volatility prevailing in the markets makes the situation worse as the prices may go up or down 5 per cent during this time.
The cost of transaction is also high as normally online brokers charge brokerage as high as 0.20-0.25 per cent for non-delivery based transactions and between 0.50-0.75 per cent for delivery-based transactions.
Investors also do not get streaming data on their computers like the brokers do. This is because, clients get a browser-based web application which works on request-reply model, more suited for document presentations.