ragingbull.com
The next broker generation
Investor 2000 06/25/99 4:30 PM
By Brad Hill
There is a universal law of technology evolution, which in its most concise form might be stated like this: Multiplying choices require consolidation. In other words, when technology makes our options too numerous, a market open for simplification. Call it the Law of Single Solutions. Manifold choices are gathered into a single service.
You need look no further than the World Wide Web to see this law in action. The Web has existed for a slim five years, but during that time content choices have multiplied like Viagra-enhanced rabbits, creating a wholly unmanageable universe. Even the search engines can't keep up. Their automated search-and-return functions are generally useless.
In the face of the Internet's content glut crisis, the marketplace for portals opened; and we all know the impact that solution has had on the Net and the stock market. The primary function of a Web portal is to aggregate content and consolidate choices. These sites make life easier for people who don't have time to prioritize too many choices.
Low-tech versions of this universal law exist all around us; supermarkets, multi-vitamins, television news programs. Any product, publication, broadcast or service that routes our basic desires (for food, health, information) to specific solutions (produce, vitamin formulations, edited news) is operating within the marketplace specified by the Law of Single Solutions. Of course, each single-solution product is vying to be the best, most-complete, fastest, most-convenient and least-expensive single solution to our needs.
The stock exchange portal
How does the Law of Single Solutions apply to the investment world? Some manifestations are as old as stock trading itself. Even the most primitive stock exchange is an aggregation of choices, like any marketplace. Nasdaq, launched in 1971, hitched its wagon to the star of emerging computer technology in order to provide greater simplicity and efficiency to the stock marketplace. While certainly a competitive force against the long-established New York Stock Exchange, the Naz avoids market overlap by dealing exclusively with a separate universe of stocks.
New forces of competition aren't nearly so gracious. Alternative stock exchanges, operating as computerized, database-driven order-matching systems, are grabbing trading volume at a rate that cannot fail to alarm the established exchanges. Offering greater efficiency, better prices and expanded trading hours, these electronic communications networks, or ECNs, have rattled the status quo, motivating the NYSE and Nasdaq to plan extensions for their trading days.
The nature of ECNs, questions of liquidity, and the currents of competition are subjects I've discussed here in past columns, so I won't review them now. The point is that the proliferation of alternative stock exchanges creates just the sort of multiplying-option scenario that catalyzes the Law of Simple Solutions. As individual investors are increasingly faced with deciding not only what stocks to buy and sell, but what exchanges to shop in, some kind of aggregation is needed.
Enter a new kind of online brokerage: The stock exchange portal.
The flagship of a new fleet of online brokers is CyBerCorp (yes, that's an upper-case "B" in there, and it's no more fun to type than it is to look at), a Texas-based trading-technology company that lusts after the swelling marketplace of home-based day traders. Other emerging trading platforms include account-based products from TradeCast, Tradescape and Optimark.
CyBerCorp offers the most mature, robust and demonstrable system. (You can download and try out a limited-version demo of its CyberX client trading platform at cybercorp.com The brokerage arm of CyBerCorp, unsurprisingly called CyBerBroker, develops and distributes two main trading products, CyBerX and CyBerTrader. The company targets institutional traders, hedge funds and other online brokers through technology licensing deals, but is garnering media attention for its stab into the home-trading marketplace.
Advanced traders who are willing to pay for real-time information are treated to Level II Nasdaq quotes, streaming transaction data and other day-trading data tools packaged in an interface that looks remarkably like a recreational program, or even a computer game. Obviously, ease of use is an image under cultivation here. In fact, the company and its products present a puzzling contradiction of intent. CyBerCorp claims to refuse three out of every four account applications for lack of trading experience, yet it is obviously creating a simple, almost dumbed-down interface to a sophisticated trading environment.
But the real interest lies in CyBerBroker's back end, where orders are routed automatically to the exchange (traditional or ECN) that can provide the best fill of the order's requirements. This is the Law of Simple Solutions in action and it marks a true milestone in the evolution of online brokerages.
CyBerCorp emphasizes its uniqueness in its press releases by referring to other brokers as "first-generation" solutions and "traditional" online brokers. By applying an old-world stigma of primitiveness to its competitors, CyBerCorp positions itself as not only a cut above, but several steps ahead.
More than a fancy front end
The company has a point. Typical online brokers are little more than fancy front ends hiding the same old nonsense. You may enter your order differently than in the old days of human-only brokers, but once entered, that order is likely to traverse the same route to the market as before. And the back-end order stream of these brokers is sometimes polluted by revenue-sharing agreements between broker and market-maker that herd orders in pre-assigned directions.
Perhaps CyBerCorp's most startling and audacious press release to date was issued on Feb. 12 under the headline, "Day Traders Suing E*TRADE Should Not Have Been With a Traditional Internet Brokerage To Begin With." Adding insult to injury is hardly a respected public relations tactic, but in this case CyBerCorp wanted to shine the light of illumination on a better alternative for frustrated traders.
CyBerCorp enjoys established relationships with the Island and Instinet ECN exchanges, as well as evolving relationships with REDIBook, NexTrade, Brut and Archipelago. (Archipelago enjoys substantial investment from both Goldman Sachs (GS) and E*Trade (EGRP).) This is essentially the same marketing strategy employed by the Yahoo!, Excite and Lycos portals when they forge strategic alliances with content providers on the Web. In each case, the point is to create a one-stop solution to the problem of too many choices.
In the investment world, exchanges are multiplying almost as quickly as stocks. Just as Amazon.com (AMZN) is the great e-commerce consolidator, so will a new breed of online brokers gather multiple exchanges under one virtual roof. By plying the Law of Simple Solutions, CyBerCorp is the early leader. |
