Electronic Commerce in the Retail Brokerage Industry: Trading Costs of Internet Versus Full Service Firms

31 Pages Posted: 23 Oct 2008

See all articles by Yannis Bakos

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Wonseok Oh

McGill University - Desautels Faculty of Management

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business

Gary Simon

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: November 1999

Abstract

Electronic brokerages on the Internet represent one of the most successful examples ofelectronic commerce, having captured over 20% of retail stock trades. According toeconomic theory, prices of commodities like securities should converge to one price in amarket with the transparency of the Internet. A review of published commissions foronline brokers shows that this "law of one price" does not appear to hold for thecommissions charged by retail brokers. In this paper we explore one possible explanationfor these differences in commissions. Specifically, we test whether the total cost oftrading, including commissions and savings based on the quality of execution, obeys thelaw of one price. In a carefully designed experiment, we simultaneously purchased orsold 100 share lots of stock using a voice-broker, an expensive online broker and aninexpensive online broker in each trial. We found relatively few price improvements,which are a measure of execution quality. The difference among brokers in obtainingprice improvements was not statistically significant. The brokers do exhibit statisticallysignificant differences in total trading costs; at a volume of 100 shares commission costsdominate execution quality. We explore the implications of the findings for larger lotsizes, choosing a broker, and electronic commerce in the brokerage industry.

Suggested Citation

Bakos, Yannis and Oh, Wonseok and Viswanathan, Siva and Simon, Gary, Electronic Commerce in the Retail Brokerage Industry: Trading Costs of Internet Versus Full Service Firms (November 1999). Information Systems Working Papers Series, Vol. , pp. -, 1999. Available at SSRN: https://ssrn.com/abstract=1288447

Yannis Bakos (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Wonseok Oh

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Gary Simon

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

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