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

摘要

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.