The Internet and related technologies are changing the securities business. Buzzwords such as “investor empowerment,” “democratization,” and “paradigm shift” only begin to suggest the extent to which the industry is being transformed. But if technology is the driver, regulatory change is the pit crew.
Consider a few recent examples. A couple of years ago, Congress repealed the Depression-era Glass-Steagall Act, eliminating barriers between commercial banks such as Citibank and investment firms such as Salomon Smith Barney. Later, Congress was debating whether to repeal the ban on trading single stock futures (surrogates for the underlying securities) and which set of laws – securities, commodities, or both – would apply to that area of trading.
U.S. exchanges shredded trading in fractions in favor of decimals. In the following years, the securities settlement cycle shrunk from three days to one day, dramatically reducing risk in the financial system. Eventually, a security may trade globally and continuously as firms pass their trading book from closing markets to open markets.
Those considering the effect of technology on the U.S. securities markets must assess the fate of traditional market intermediaries, such as brokers and floor-based exchanges. Even the most casual observers note that new competitors are upending the established order: online brokers threaten mainline firms with their traditional sales forces; unregulated Internet portals are evolving into account aggregators that compete for eyeballs with brokers and banks; electronic communications networks (ECN, sometimes referred to as alternative trading systems, or ATS), and foreign exchanges threaten traditional floor-based exchanges; and commercial banks aim for size by merging with securities firms.
LEGACY FROM THE 70’s
In one sense, this change has been coming for at least a quarter-century. Before 1975, brokers operated under a fixed-commission rate structure. On May Day 1975, the SEC eliminated fixed commissions, opening up rate competition among broker-dealers and fueling the rise of discount brokers. For the past 25 years, investors who wanted professional investment advice used full-service brokers, investment advisers, or financial planners, while investors who wanted to direct their own trading used discount brokers.
The Expanding Universe
In the past year, we have discovered that the universe is expanding at an accelerating rate and is probably flat rather than curved. We have found evidence that dark matter fills the universe. We have completed the first draft of the human genome and started building the fastest computer to solve even more complex problems in biology. All these events and more are hints that a scientific revolution is under way. They challenge old accepted ideas and ways of doing things and open pathways into the future.
A world of accelerating discontinuities was the core of the message in Future Shock. The next scientific revolution, which we can now see emerging will bring at an even faster pace still greater discontinuities. Recent developments in physics, biology, chemistry, mathematics, and other disciplines will alter in revolutionary ways our understanding of the natural world. Such shifts in our worldview often lead to fundamental shifts in social and political thinking and to huge jumps in technical capabilities.
Scientific advances often rely on new tools to open arenas for exploration. The telescope and the microscope changed our view of the very large and the very small. Atom smashers, now called particle accelerators, made it possible to explore the interior of the atom. X-ray crystallography made possible the discovery of the double helix of the DNA molecule.
New scientific tools are leading to profound insights into the realities of nature. Astronomical instruments, including space-based technologies such as the Hubble telescope have taken us almost all the way to the edge of the universe and back to its origins in the Big Bang. Over the coming decade, we anticipate adding significantly to the existing ranks of enormous and powerful telescopes. At the other end of the spectrum, the scanning tunneling microscope has given us the ability to see and manipulate individual atoms. New imaging techniques have allowed us to observe the dynamics of very fast chemical reactions.