Who Started Online Stock Market Trading?
Millions of individual investors in the United States hold online brokerage accounts today in which stock trading, whether buying or selling, is just a mouse click away. It is difficult to imagine how different things were just 15 years ago when most people had no access to or even knowledge of the World Wide Web. Opportunities to use a personal computer for stock trading would have seemed science fiction.
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The End of Fixed Commissions
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The Securities and Exchange Commission (SEC) sowed the seeds of the development of online trading when it scrapped the fixed minimum commissions on stock trades on May 1, 1975. This move heralded an era of increased competition between brokerage houses and allowed discount brokers to enter the business, offering stripped-down services at lower rates.
Touch-tone Trades
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Discount brokers took measures to cuts costs in order to support their business model of lower commissions. One of the ways they did this was to remove the human broker from the equation. TransTerra Inc., from which grew today's TDAmeritrade, allowed its customers to trade on their account using touch-tone signals from their telephones starting in 1988.
Proprietary Trading Systems
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Soon, Charles Schwab Inc. grew to become the king of the discounters, and it used touch-tone trading extensively, offering additional discounts for those who chose not to use a live broker. It also pioneered a number of PC-based programs that clients could use to access their accounts, but these were proprietary systems and were not accessed using the World Wide Web. These included the Equalizer, based on the DOS operating system, and SchwabLink, aimed at financial advisers rather than retail investors.
Web Trading
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The first brokerage firm to offer a true online service to the retail investor was K. Aufhauser & Company, which launched their online stock trading product in 1994. TransTerra, today's TDAmeritrade, acquired K. Aufhauser just one year later in 1995. Other discount brokers such as E*Trade Financial and Charles Schwab quickly recognized the cost advantages of online trading and rushed to offer online trading in 1996. E*Trade ultimately eschewed telephone touch-tone and live broker options completely and offered only online trading to its customers.
Competition
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As the markets boomed in the late 1990s, trading volumes soared and discounters' rates were pushed ever lower by competitive pressures. Individual investors and traders found themselves growing increasingly comfortable with online trading, and even full-service brokers such as Merrill Lynch reluctantly accepted that they needed to offer their clients a cut-price, no-frills online trading option. Intense competition has led, however, to even the discounters reintroducing premium services, including investment advice and help with asset allocation.
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