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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14286
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| Title: | Electronic Commerce in the Retail Brokerage Industry: Trading Costs of
Internet Versus Full Service Firms |
| Authors: | Bakos, Yannis
Lucas, Henry C., Jr.
Oh, Wonseok
Viswanathan, Sivakumar
Simon, Gary
Weber, Bruce |
| Issue Date: | Nov-1999 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | IS-99-14 |
| Abstract: | Electronic brokerages on the Internet represent one of the most
successful examples of electronic commerce, having captured over 20% of
retail stock trades. According to economic theory, prices of commodities
like securities should converge to one price in a market with the
transparency of the Internet. A review of published commissions for
online brokers shows that this "law of one price" does not
appear to hold for the commissions charged by retail brokers. In this
paper we explore one possible explanation for these differences in
commissions. Specifically, we test whether the total cost of trading,
including commissions and savings based on the quality of execution,
obeys the law of one price. In a carefully designed experiment, we
simultaneously purchased or sold 100 share lots of stock using a
voice-broker, an expensive online broker and an inexpensive online
broker in each trial. We found relatively few price improvements, which
are a measure of execution quality. The difference among brokers in
obtaining price improvements was not statistically significant. The
brokers do exhibit statistically significant differences in total
trading costs; at a volume of 100 shares commission costs dominate
execution quality. We explore the implications of the findings for
larger lot sizes, choosing a broker, and electronic commerce in the
brokerage industry. |
| URI: | http://hdl.handle.net/2451/14286 |
| Appears in Collections: | IOMS: Information Systems Working Papers
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