Retail Stock Trade

A case study in transforming of Retail Stock Trade

Retail Stock Trading and Brokerage firms Retail

Stock Trading is a service where companies/ brokers facilitate the buying and selling of stocks in the market by investors.

Legislations

in US require that registered brokerage firms must act as a agent between the investor and the financial markets.

This is where brokerage firms like Merrill Lynch

and Schwab come in.

Until 1975, the brokerage firms in US had their

commission fixed by the government regulators.

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Hence

the retail brokerage industry’s core product, stock trading, was largely an undifferentiated commodity.

In order to differentiate themselves, established

brokers competed by offering proprietary bundles that include complimentary components to the trade, such as research and personalized investment advice.

Deregulation in 1975 launched discount

brokerage firms that charged lower commissions, butLynch: didn’t investment advice. Merrill A Case provide Study in transformation of Retail Stock Trade

The end of fixed commissions led to two

market segments for trading securities: Traditional investors who wanted their services

provided by a full-service broker. Self-directed investors who only needed trade

execution services from a discount broker.

Merrill Lynch It was a traditional full service brokerage firm. It occupied a comfortable position as the largest

brokerage firm in the world.

It had more than 60000 employees in 40 countries as

well as a relationship with more than 5 million households.

The company had more than $1.5 trillion in assets

under management and institutional trading tops $30 billion a day.

Merrill Lynch: A Case Study in transformation of Retail Stock

Trade It had around 17000 retail stock brokers

Business Model Merrill’s business model consisted of full service

brokerage which included all brokerage to investment advice.

services

from

Its services extended beyond retail brokerage

services. It provided institutional trading and investment banking services amongst others

It had a research department that produces

research products for the brokerage workforce.

Brokers

provide clients with research and encouraged them to place trade with Merrill Lynch. Merrill Lynch: A Case Study in transformation of Retail Stock Trade

The firm earns revenue primarily from Commissions Underwriting Fee based account management And a variety of other sources

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Growth of self directed investors Self Directed investors are investors who only

need trade execution service from the brokers and not investment advice. Internet helped in their growth by allowing

brokers to commission

charge

very

low

levels

of

Large amount of content on the net made it

easy for investors to conduct Merrill Lynch: A Case Study in transformation of Retail Stock themselves, often for free. Trade

research

Disintermediating of Industry Because

of regulations it would be difficult investors to directly interact with the exchanges.

for

However with the onset of internet, minimal human

interference existed between the investor and the exchange.

A customer of one of these firms can enter an order

directly into his/her computer. Without human intervention, the online broker’s computer route the orders to the market for execution.

This diminished the role of the broker in the stock

trading transactions.

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Organizational issues Merrill Lynch’s plans for embracing internet

business model faced opposition from its 17000 brokers. This was because they felt that trading on

internet had the potential to drastically reduce the commissions which would reduce their pay. Apart from this, Merrill Lynch was extremely

successful company and on top of the industry

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Other Issues Loss of market capital due to perception

amongst the people that Merrill Lynch did not understand the internet and hence cannot do well in it. The increasing competition from online

discount retailers like Schwab. For eg: Although Merrill’s assets grew by

around 10%, the assets of Schwab grew by Merrill Lynch: A Case Study in transformation of Retail Stock 40% Trade

Merrill Lynch: A Case Study in transformation if Retail Stock Trade

Merrill Lynch was among the late entrants

into the online stock trading market. It initially sought to counter the challenge of

internet brokers by offering certain online services like free It also sought to dramatize “dangers of buying

and selling stocks unassisted over the internet” through a public campaign. Merrill Lynch: A Case Study in transformation of Retail Stock Trade

But the popularity of e brokerage kept on rising. As customers flocked to e-brokers, the firm faced

an 85 % compression in its margins. In late 1998, Schwab’s market value exceeded

that of Merrill Lynch . This was the single largest event that motivated

Merill Lynch to adopt the Internet and change its business model. Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Initially

were very apprehensive about the internet broker model, but later on as the demand for online broker soared high they also had to join the wagon.

Merrill Lynch began by offering free access to its

stock research over the web for a 4 month trial period.

Merrill later offered online trading at fees of

$29.95 matching Schwab.

 This web service allowed individual to set up

online accounts to trade stocks, bonds, and mutual fund, and eventually stock options.

Merrill Lynch: A Case Study in transformation if Retail Stock Trade

Customer could obtain complete reports on their

holdings and transactions, pay bills and handle other financial tasks through Merrill Lynch.

It introduced a new account called “Unlimited

advantage” to spread fee based accounts among customers.

For a percentage of the assets, starting at $1500

fee per year, the account holders could access all of Merrill’s online services and as many trades as they want, electronically or through a broker.

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Hence the Internet forced Merrill Lynch to

change its business model that concentrated commission based revenue to one that focused on fee based revenue. It removed Merrill’s dependence on

commissions and made them focus more on other services. Although Merrill Lynch expected to lose $ 1

billion, it hopes to make it up in fees and

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Role of Internet in Transforming Retail Stock Trade Internet has transformed existing industries

and also created new ones. Internet enabled transformation can: Improve the effectiveness of the organization Lead to new organization structure and

relationships with other firms Reduce overheads Lead to strategic advantages  Merrill Lynch: A Case Study in transformation of Retail Stock Trade

Impact of the Internet is very well illustrated

here in the case where Retail Stock trading was completely transformed by the use of internet.

In the mid 1990s, when the first e-brokers

appeared, the use of IT and the Internet provided online brokers with a significantly lower cost structure than full-service brokers.

For example, online brokers do not require

physical branch offices and large no. of

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

This

allowed them to drastically reduce the commission charges.

The availability of information online for free also

diminished the importance of research services provided by traditional full service firms.

This lead to increase in directed investors Internet also enabled the disintermediation of

retail stock trading.

Merrill Lynch: A Case Study in transformation of Retail Stock Trade

IT has changed the nature of retail stock

trading and full service brokerage business model forever. In a few years, few customers will be left for

the full commission broker. They will have to adapt to low commission

trades or fee based services. Merrill Lynch: A Case Study in transformation of Retail Stock Trade