Technology Is the Reason Discounters Can Discount

How can discount brokerages charge so little and still make money?

Thank technology--and, at many discounters, a limited product menu.

Competition on Wall Street has intensified at all levels in recent years: The New York Stock Exchange competes for business with regional exchanges, such as the Pacific Stock Exchange, and major brokerages compete with each other for trades on the exchange floors and in the over-the-counter stock market.

Discount brokerages have benefited from that competition because the fees they must pay to carry out a customer’s trade have dropped. Most discounters can’t afford to have their own traders at the NYSE, for example, but they don’t need them--not, at least, when major brokerages already on the NYSE floor are happy to execute the trades for a small (and shrinking) fee.

Technology is basically the great equalizer: Because computers assure that all stock orders will get the best price at any given moment, fee competition is the only weapon left in the fight for trading volume.

Technology also helps discounters in other ways. Most do business almost exclusively by phone, so there’s no need for the lavish offices (and lavish overhead) that full-service brokerages maintain. And today’s powerful desk-top computers allow discounters to access and track customers’ accounts in the blink of an eye--which means that discounters’ telephone order takers can do more business per hour.

Finally, many discounters keep prices low by keeping their business simple--mostly, just stock and stock-option trading. L.A.-based Pacific Brokerage Services, for example, won’t buy or sell municipal bonds. Other discounters typically shun mutual funds and tax shelters. If you want to trade in those investments, you’ll probably have to use a full-service brokerage.

Some discounters have tried to carve specific--if narrow--product niches to lure new customers. A few examples:

* George Brown & Co., a Boston-based discounter that opened an L.A. office last fall, markets itself as an “upscale” firm: Brown requires that clients have at least five years of investing experience, and won’t open an account for less than $10,000 in cash or securities.

Brown contends that by restricting its clientele, it avoids high-maintenance, low-activity customers and thus can keep costs lower for its chosen customers.

* Fidelity Brokerage Services, an arm of mutual fund giant Fidelity Investments in Boston, allows customers to place orders automatically via a touch-tone phone--and gives an additional 10% discount on such orders. The advantage to Fidelity: Its human telephone reps are freed for other purposes when customers use the automated system.

* New York-based discounter Royal Grimm & Davis is targeting do-it-yourself investors who want to buy shares of foreign companies, which often trade in the U.S. over-the-counter market as ADRs, or American Depositary Receipts.

Royal Grimm promises clients fast quotes and trades even in obscure ADRs. The firm contends that many full-service and discount brokerages are “ill-equipped” to locate and trade most foreign ADRs.