Putting Money Where Your Mouse Is

L.A. Times Archives

April 29, 1997 12 AM PT

Although it represents only a fraction of the nearly three quarters of a billion shares brokered each day on the nation’s exchanges, online trading carried out by a personal computer is generating more than its share of hoopla among individual investors.

And it’s not hard to understand why.

If you’re computer-savvy; willing and able to do your own investment research; and blessed with an abundance of faith in technology and the security of phone lines, you stand to save a bundle in commission fees. You will also have quick access to data and the opportunity to restructure your investment portfolio whenever the need, or fancy, strikes.

About three dozen institutions offer their customers either account access or transactions by the Internet, with dozens more planning such service within the year.

By 2001, Forrester Research of Cambridge, Mass., predicts, 10 million investors will have online accounts, comprising 8.5% of the nation’s retail investment assets.

None of this comes as any surprise to K. Blake Darcy, chief executive of PC Financial Network, a service of Donaldson, Lufkin & Jenrette Securities. In 1988, he launched the New York brokerage’s online service, making PC Financial one of the pioneers of this business.

As his competitors have multiplied over the past decade, Darcy has become convinced that online investing offers one of the few opportunities for the cyber-consumer to save money over the previous way of doing things. Most online shopping, he notes, is not that different from catalog browsing and using an 800 phone number.

But trading securities over the PC, he maintains, gives the investor a qualitatively similar service for a substantially lower price. Darcy talked earlier this month with Times columnist Carla Lazzareschi.

Times: Who is the ideal user of an online trading service?

Darcy: Someone who does their own research in selecting stocks and mutual funds and who likes the concept of going to the computer to get the research and timely information.

They’re often small business owners who are using the PC extensively during the course of the day to manage their their business. And they’re very used to the idea of doing things on their own. So the idea for them of using the computer to actually manage their personal finance is a fairly small step.

Times: Are there any demographic patterns in these customers?

Darcy: In the early days of online you saw it mirror fairly well the general investing population: a 45-year-old, male, $75,000 household-income type of customer.

With the Internet and America Online, it’s becoming more of a mass market. . . . We’ve seen the average age of our customer begin to drop. We’ve also seen an older market develop where people are now becoming more comfortable with the technology. If you’re retired, maybe it’s going to be more enjoyable to surf the Web than watch soap operas. They have money and they have time--perfect for online trading.

Times: Your company is at the high end of the online brokerage business, and you provide a lot of research and data for your customers. But isn’t the customer for these services the kind of person who wants to do his or her own research and pay the least for the actual trade? Why wouldn’t I just go to a company that’s going to charge me a flat $12?

Darcy: You might, except what service are you going to get for the $12?

It isn’t just placing the trade and having everything work perfectly. . . . You get into issues of reliability of the site. You get into issues of speed of execution. What happens when you send an e-mail? How quickly do you get a response? Do the people at the other end know what they’re talking about?

We’ve been in this business for nine years. We have more experience than anyone else in handling these types of transactions. We have systems that we’ve built and taken years to develop at the back end to give very high levels of service. And if you go onto [Internet] bulletin boards, you will see that [customers see] a big difference between online brokers.

Times: What are your rates now?

Darcy: $39.95 flat for regular accounts and $29.95 for frequent traders.

Our rates would have been considered deep, deep discount a year and a half ago to two years ago. So everything’s relative.

In the world of the online, [discount brokerage] Schwab is at $29.95 and up. Fidelity is still a bit above that, more in our range. Larger names typically [charge] in our range.

Times: Whom do you regard as your primary competition: other online trading services, full-service brokers or discount brokers?

Darcy: Our toughest competitor is a really good broker. A really good broker has really good relationships with high-net-worth individuals. . . . Those are the toughest ones to compete against, because they’re adding lots of value to consumers . . . .

No one is going to get anywhere trading discount brokerage customers among themselves. So is Charles Schwab a competitor? Yes. Is E*Trade a competitor? Yes. But really who we’re competing for are the customers who are right now using full-service brokers and who are starting to think about doing things a bit on their own.

[We’re also competing] for the group of people who are just coming into investing for the first time . . . . I think our toughest online competitors are going to be Schwab and and E*Trade because they put focus on it. They’re serious about it.

Times: Are there reasons beyond price that make online trading preferable to going through a full-service a broker?

Darcy: We’re finding that while individuals might want to have their a broker handle a portion of their portfolio, they also want to try it on their own . . . . [It’s] a way of feeling more in control of their investments. . . . They’ll decide when to buy stocks and at what prices . . . .

Eighty percent of our orders are limit orders. People are saying, “I’m interested in this company, but I’m interested at this price.” Not: “I want it today at any price.” Online makes it very easy to manage that process.

People say it’s more convenient. At 10 o’clock at night when everything is quiet in my house, I can go do my research . . . [and] make my own decision. I can’t call a broker at 10 o’clock at night and talk about my portfolio. I can do it with online brokerage.

Times: What do online traders need to watch out for?

Darcy: From the consumer’s standpoint there has always been a potential problem out there [from] the use of bulletin boards to promote low-priced, thinly traded stocks. By having some people in concert go in and talk about these types of stocks, these stocks can get pushed up dramatically in price, and then, of course, the people who got in before they started pumping up the price get out and leave everyone else to suffer the consequences.

[Another issue] is capacity planning. If you have your entire customer base doing transactions electronically, what happens when you have huge surges? Firms have got to be prepared to handle high capacity at a moment’s notice. They’d better be ready to do it from a technology standpoint, but they also better have a backup plan for handling it over the phones and in other means.

No one knows what’s going to happen to the Internet if you have a crash environment. How many people will be going on, checking their portfolios, checking for news, checking for events? What will happen to response times? Will you be able to get in to your access provider? If not, then what are you going to do? Will you be able to get through to your broker?

Those are things we have to worry about.

Times: Is there a good reason for investors to worry about getting through in a crisis?

Darcy: There are firms who have had to pay lots of money to customers . . . [who] couldn’t get in online, and when they tried to go to the 800 numbers, there weren’t enough people to handle it . . . .

Well, in a fast-moving market, are you going to put up with that? Are you going to say: ‘That’s OK; I don’t I don’t mind. I know I’m only paying $14.95, and I’ll take the $5,000 loss as a result’? I don’t think so.

Times: Do you think online customers are more or less likely to panic if there is sudden crash than are people who call up a broker to trade?

Darcy: I think the online investor is more informed than any other type of investor.

What’s interesting, though, is when we’ve had sharp downturns, you haven’t had people panic online. You’ve had people go in and buy. You’ve had people say “Oh, here’s a good opportunity to pick up some of my favorite stocks at a lower price.”

Times: What about privacy? Should investors be worried about sending financial information over the Internet that might somehow be intercepted?

Darcy: I’m sure every broker is using encription to transmit anything that’s at all sensitive. What I get a kick out of is that everyone goes to a restaurant and hands someone their credit card. It goes into a back room, and they could have a little printing press there, putting out additional credit cards with your name and your number on them. But you don’t lie awake thinking about that.

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Online Trading Places

Investing online has never been easier, provided you have a computer and a modem. Over the last two years, start-ups and brokerage houses expanding their services have filled the World Wide Web with trading options.

Here, compiled from several sources, are the Web sites of a number of brokerages. But there are plenty of others; an Internet search engine (such as Yahoo, at https://www.yahoo.com) will generally come up with close to 100. Commission prices are generally lower than those for other means of trading. Standard fees can range from $10 a trade to more than $40 a trade through a brokerage that offers additional services.

Brokerage / Website

Accutrade: https://www.accutrade.com/

American Express Financial: https://www.americanexpress.com/direct/

Brown & Co.: https://www.brownco.com/

Bull & Bear Securities: https://www.bullbear.com/

Ceres: https://www.ceres.com/

Datek: https://www.datek.com/

eBroker: https://www.ebroker.com/

Empire Financial Group: https://www.lowfees.com/

E*Trade: https://www.etrade.com/

e.Schwab: https://www.eschwab.com/

Fidelity: https://www.fidelity.com/