Of interest
Monday 22 March 1999
Market studies online exchange
Technology already exists for Internet stock
trades, expert says
Jeff Pappone
The Ottawa Citizen
With the explosive growth of online trading, experts say a full-fledged Internet
stock exchange may be just a few years away.
Christopher Hill, a senior partner with Axiomatikos Corp., an Ottawa-based
Internet application developer, said the technology to run a Web-based stock
exchange already exists.
"If (stock quotes) are broadcast from one server, everyone will get the
information at practically the same time. In principle, there's nothing to
prevent (the development of a Web-based exchange)."
Added Mr. Hill: "If I were the TSE or Nasdaq, I'd be nervous."
In fact, the threat --Êor opportunity --Êdoes not appear to have escaped either
organization.
Nasdaq spokesman Scott Peterson said the U.S.-based electronic board is
already looking into the logistics of an Internet stock exchange, while the
Ontario Securities Commission says it is considering an "alternate trading
system" that would run independently of the Toronto Stock Exchange.
OSC spokesman Mark Conacher said a decision concerning the shape of
such a system is expected in May.
Already, almost half the transactions processed through discount brokers in
the U.S. are Internet trades. In Canada, the number of online investors is
expected to rise from 200,000 in 1998 to one million by 2004.
E*Trade, a large U.S. discount brokerage, moved into Canadian cyberspace
late last year in response to the growing demand for online trading. The next
step, many believe, is some form of Internet-based stock exchange.
Before a Web-based stock market can be made to work, however, several
crucial problems need to be addressed.
Chief among them is the challenge of creating a level playing field in an online
environment that is inherently unstable and inequitable.
Traders with fast cable modems, for example, could conceivably have an
advantage over traders relying on narrowband dial-up modems.
Even with the latest technology, it would difficult to ensure that someone
doesn't get an advantage, Mr. Hill said.
"But it's like the real world," he added. "If you call your broker and he takes
another bite of his sandwich before he makes the trade, you could lose."
Styianos Perrakis teaches economics and finance at the University of
Ottawa. His concerns about Internet brokerages have nothing to do with
technology. Rather, he wants to know how a Web-based exchange would
guarantee money is there to pay for purchases.
A broker, whether online or full-service, is a safety mechanism that
guarantees money changes hands, he said. An Internet stock market would
need a system where money is in an account before trading occurs.
"The idea is to ensure the contracts are honoured," he said. "They must
protect against fraud."
Mr. Perrakis said the question of how to regulate online exchanges needs to
be answered.
The Ontario Securities Commission is currently grappling with this very issue
-- not only as it relates to the emergence of a new "alternate trading system,"
but in the context of current online trading activity.
"Traders making trades in Ontario must be licensed in Ontario," , Mr.
Conacher pointed out. "This regulation applies to Internet transactions."
Pitfalls and technical challenges aside, Jim Carroll, author of the Surviving the
Information Age, says an Internet stock exchange will happen within the next
five years.
But that doesn't mean the death of existing exchanges like the TSE. Instead,
he said, Web-based exchanges will be niche orientated, like the Nasdaq.
Others, however, say that with more investors joining online brokerages every
day, the traditional, full-service broker is in trouble. Ian Hamilton, an
investment executive with ScotiaMcLeod, called on-line trading "bad news for
brokers."
An investor online can trade stocks for about one-fifth the cost of a full-service
broker. Most sites offer trades with commissions under $30.
Members of online brokerages can also trade stocks at any time of day or
night, although under current rules the transactions are not processed or
executed until the stock market opens.
Some believe the unwillingness of online investors to wait until the next
morning to see transactions processed makes the arrival of extended trading
hours inevitable. Even the staid New York Stock Exchange is considering
changing its hours to respond to demand. Last week, the NYSE confirmed
it's looking at opening from 5 a.m. to midnight.
Mr. Perrakis, for one, said he is certain any move to extend current hours will
lead to 24 hour trading. "If you are going to be open 19 hours, why not just
make it all day."
Rick Broadhead, co-author of the Canadian Internet Handbook, said the good
news for brokers is that because people can't stay up for 24 hours, they'll
need brokers to keep an eye on their investments.
"People will need to have someone to tell them what happened while they
were sleeping. Full-service brokers will adapt."
One thing do-it-yourself traders shouldn't have to worry about is the security
of their transactions -- whether through online brokers or a Web-based
exchange.
Mr. Hill said encryption programs now used by on-line brokers are almost
impossible to break. People running the trading sites know their clients are
concerned with security, so the brokers make a concerted effort to ensure
privacy.
For his part, Mr. Carroll said the evolution of trading will not end with
Web-based stock exchanges.
"I think the real trend is going to be companies that deal stocks from their
own Web sites."
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