Ask and ye shall . . .
Direct Access The Next Big Thing
National Post
The announcement was a puzzler. Why would Charles Schwab Corp., king
of the U.S. online discount brokers, want to buy a small,
little-known broker-dealer based in Austin, Tex.? Still more
mysterious, what makes CyBerCorp Inc. worth almost half a billion
dollars to Schwab?
The answer is that CyBerCorp embodies the next big thing in online
trading. Its fast direct-access trading services put active
individual investors and day traders right into the ring, alongside
the professionals and market-makers who used to enjoy profitable
monopoly access.
Only a small minority of Schwab's existing clients want to do this,
but they do a lot of transactions and generate lots of commission
revenue. Schwab doesn't want to keep on losing them to the likes of
CyBerCorp.
Most investors who call their full-service broker for a quote are
familiar with the disappointment of paying a higher price for stock
than they expected, or getting a lower price when they sell. They
also frequently experience long and potentially costly delays from
when they place an order to when they learn it's been completed.
Standard online trading through discount brokers has done little to
change this. That's because all that happens is that you send your
order to the broker by e-mail instead of with a telephone call. The
broker still sends the order through the same several communications
layers, between you and where the order is actually filled by a
market-maker in the stock.
Online trading is cheaper because the discount broker doesn't have to
employ people to take your orders and listen to your complaints. It's
also cheaper for a less controversial reason. In today's markets,
there are several different places where orders can be executed, in
addition to the stock exchanges and the Nasdaq system. These include
fast-growing electronic communications networks, or ECNs, which match
orders electronically. Checking all these places is important to get
the best available price for clients' orders.
However, discount brokers generally have deals with exchanges and
market-makers who pay for orders directed to them. These payments can
be a substantial portion of a discount broker's revenue. They mean a
client's order may not always be executed at the best available price.
CyBerCorp, founded in 1995, does not pay for order flow. Its founder,
Philip Berber, says those deals mean that the e-mail online brokers
get paid twice, and the online trader pays three times.
Direct-access trading became available to investors in Nasdaq stocks
only as a result of action by the U.S. Securities & Exchange
Commission. The move followed an investigation into allegations that
Nasdaq market-makers systematically overcharged clients by tacking on
markups to buy orders and markdowns to sell orders, over the real
market price.
The so-called small order execution system, or SOES, now requires
Nasdaq market-makers to fill orders for up to 1,000 shares at the
real or inside price immediately. Investors then cannot put in
another order for the same shares on the same side of the market for
five minutes. This is to prevent buyers from hitting the market-maker
with a barrage of consecutive 1,000-share orders. Nothing prevents
buyers from immediately selling the shares they've just bought,
however. Berber calls direct-access trading the second generation of
online investing.
There still remained the difficulty of quickly checking all the
different methods of order execution now available for the best price.
Enter the third-generation system, offered to active investors by
CyBerCorp. When a customer places an order, the system can
automatically scan for the best available price and execute the
order. Experienced traders can also decide to do the scanning
themselves, Berber says.
This artificial intelligence capability could well be what makes tiny
CyBerCorp worth so much to Schwab. A system that cuts out the middle
men and guarantees the best available price could win wide acceptance.
To get the speed, you don't use your regular Internet browser. You
download CyBerCorp's software to your personal computer. It then
establishes a direct Internet connection to CyBerCorp's servers. The
software provides a more in-depth picture of what's happening in the
markets than even your broker usually sees. The information is
updated as transactions occur and price quotations change, and it's
all free to clients.
You do need fairly powerful computer equipment and a high-speed,
always-on connection to the Internet. Trading commissions, although
low, are higher than standard U.S. discount-broker commissions. There
are also minimum account sizes and transactions, and required levels
of experience, which vary with the several levels of service
available. Options trading is not yet available, but the firm is
testing a system and promises it will soon go live.
Schwab president David Pottruck has some advice for customers who
want to take advantage of CyBerCorp's services. "I would encourage
clients who want to trade actively to open a second account with
CyBerCorp." |
