The Internet has changed the face of business in so many ways, but nowhere have the changes been as dramatic or fast moving as in the financial markets. Two events over the past two weeks underscore those changes.
One is the approval of a plan that would add several hours to the trading day for the 100 largest stocks traded on Nasdaq most likely going from 2:30 to 6 or 7 p.m. The New York Stock Exchange might add an extended session as well.
The other is the announcement last week by Merrill Lynch, the nation’s largest brokerage house, that it would add a low-cost service for trading stocks online.
This is big news in a world that has desperately tried to maintain its old-fashioned ways. Despite frequent efforts over the years to extend trading hours, the exchanges have pretty much kept banker hours (or what used to be banker hours). Trading has opened each weekday at 6:30 a.m. L.A. time and ended at 1 p.m.
Brokers, too, have operated under a tried-and-true procedure by which they collect a commission on the buy and sell orders their clients ask them to carry out. Go back 50 years or more and it worked pretty much the same way.
But not anymore thanks to the ability to trade on the Internet.
Merrill Lynch is a relative latecomer to the world of online brokerages, which was started several years ago by the likes of Charles Schwab and E*Trade. For growing numbers of individual investors, these services offer speed, ease and low cost generally in the range of $15-$30 per trade. Instead of waiting for a live broker to come into one’s office, here is the chance to place an order at any time of the day or night.
The hitch, of course, is that unless you use an alternative trading system still mostly the province of huge institutional investors that order will not be placed until the exchanges open for business. By extending trading hours, investors would have the chance to place their buy and sell orders in a more timely fashion.
This being a revolutionary movement, however, there are lots of considerations that haven’t been figured out.
What happens, for example, to all those brokers who will be losing business to the online movement or at least be forced to operate after-hours to accommodate their customers? Will that day’s closing price be based on the regular or extended session? Will the limited amount of trading during extended hours affect the buy or sell prices being offered?
Beyond the obvious logistics is a broader issue: Will the ease with which investors can buy and sell securities lead to knee-jerk decision-making that would be more circumspect under the old system? In other words, will Wall Street investing truly take on a Las Vegas-style daring that in the cold light of day might seem foolish?
Circumspection is a hard case to make these days, given the bull market’s velocity and endurance. But as Merrill prepares to wire itself up and the exchanges enter into longer trading days, it would be nice to see the Federal Reserve, the Securities and Exchange Commission and the Treasury Department thoroughly examine this drastic change in how trading gets done.
Even in the midst of this Internet frenzy, let someone tap on the brakes for a moment and ask the $64 question: What are we getting ourselves into?