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Stock Brokerage FirmsStock brokerage firms have been an established feature in the financial industry for nearly one thousand years. Dealing in debt securities, brokers employ a variety of systems to aid investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have changed over the years, growing to massive organizations that can affect the entire financial sector positively or negatively with their performance. Changing with the times, the early twenty-first century saw a rise of online trading that enabled the average investor to take part in the stock market for the first time.

HistoryStage 1 Beginning: During the 11th century, the French began regulating and trading agricultural debts on behalf of the banking community, creating the first brokerage system. In the 1300s, houses began to be set up in major cities like Flanders and Amsterdam in which commodity traders would hold meetings. Soon, Venetian brokers began to trade in government securities, expanding the importance of the firms. In 1602, the Dutch East India Company became the first publicly traded company in became the standard bearer for the modern financial system. Stage 2 Significance The earliest brokerage firms were established in London coffee houses, enabling individuals to purchase stocks from a variety of organizations. They formally founded the London Stock Exchange in 1801 and created regulations and memberships. The system was copied by brokerage firms across the world, most notably on Chestnut Street in Philadelphia, which was the center of American finance during the first forty years of the new United States. Soon, the US exchange was moved to New York City and for more than one hundred and fifty years Wall Street has been synonymous with the stock brokerage business. Various firms like Morgan Stanley and Merrill Lynch were created to assist in the brokering of stocks and securities. The firms limited themselves to researching and trading stocks for investment groups and individuals. which shareholders could own a portion of the business. The stocks improved the size of companies and

Stage 3: Considerations During the 1900s, stock brokerage firms began to move in a direction of market makers. They adopted the policy of quoting both the buying and selling price of a security. This allows a firm to make a profit from establishing the immediate sale and purchase price to an investor. The conflict with brokerage firms setting prices creates the concern that insider trading can result from the sharing of information. Regulators have enforced a system called Chinese Walls to prevent communication between different departments within the brokerage company. Since the 1980s stock-broking firms have also been allowed to be market makers as long as the appropriate Chinese walls are put in place. This has resulted in increased profits and greater interconnection within the financial industry. In the 1980s and 1990s, deposit growth slowed as more people invested in equity shares and mutual funds. Rather than allowing depositors to withdraw their funds and invest them elsewhere, however, many banks (through the non-bank affiliates of their bank holding companies) began aggressively offering brokerage services. In this way, banks were able to generate non-interest fee income to help offset some of the increased interest costs of relying on borrowed funds o finance their growth. Until the 1980s, commercial banks didnt emphasize their brokerage powers or solicit business, except to serve a few large accounts in their trust departments. Beginning in the 1980s, commercial banks began to offer trading services to retail customers. Some banks started their own brokerage operations from scratch and others entered onto joint-venture arrangements, whereby the bank purchases broker services from an established securies firm and markets the services under the name of the bank. To date, more than 2000 banks are providing active brokerage services to their customers Stage 4: Effects The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns created a system of consolidation. Working with hundreds of billions of dollars, the larger firms began to merge and take over smaller firms in the last half of the 20th century. Firms like Smith Barney were acquired by Citigroup and other investment banks, creating massive financial institutions that valued, held, sold, insured and invested in securities. This conglomeration of the financial sector created an environment of volatility that caused a chain reaction when other firms like Bear Sterns and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in different companies and resulted in a large economic collapse in late 2008.

Stage 5: Features A large share of the brokerage firms has moved to an online format. Smaller brokers such as E*Trade, TD Ameritrade and Charles Schwab have taken control of most individual investors accounts. With the advent of automated stock-broking systems on the Internet, the client often has no personal contact with his/her stock-broking firm. The stockbroker's system performs all the stock-broking functions: it obtains the best price from the market and executes and settles the trade. Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades. The added convenience and personal attention paid to the small investor has resulted in a large influx of activity. In addition, the fact that the online resources offer up-to-theminute pricing and immediate trades makes their format appealing to the modern user. As SEC deregulated the brokerage industry and made negotiated commissions available to individual investors around May 1975, a new type if brokerage firms has emerged the socalled discount broker. They offer fewer brokerage services and pass the savings on to the investors. Specially, most discount brokerage firms do not have a highly paid research staff producing research reports or account executives soliciting business based on the firms current recommendations to buy and sell. Instead, they hire telephone clerks to take customers orders. These clerks do not sell, do not offer any investment advice, and work for modest salaries. These and other savings are passed along to the investor in the form of low commissions. Discount brokers, like TD Ameritrade, PTI Securities & Futures and E-Trade, also provide advanced trading systems, which is why they appeal most to frequent and active traders. Beginner investors may turn away from discounted brokers because of the advanced systems and terms, and instead go to traditional brokers.

Structure of the IndustryStock broking industry has developed rapidly since 1950s and when the internet was introduced, the industry gained more pace than ever as the investors need lesser time to do the orders and were no longer necessary to go meet the brokers or brokerage firms personally as they could order up the stocks and securities they want online. Moreover, many of the traditional restrictions against banking activities within the brokerage industry were being eliminated and the barriers were disappearing. Due to this, some commercial banks have as subsidiaries,

brokerage houses that offer discounts and some of them have available accounts that offer all of the services that are offered by a checking account. 1 However, the brokerage industry saw decline in the period of 2007 to 2008 due to the global credit crisis. On the brighter side, the1

analysts predict that the decline would cease and stock broking industry sector will maintain its

normal growth rate in 2013 onwards. As the industry becomes more and more competitive, the firms within the industry offer the investigation of some quality and variety of stocks to the investors with free of charge. This is one of the methods that some firms use to compete against other stock broking firms. In order to attract vast amount of clientele, the structure of the industry has shaped itself. Since the restrictions in commissions were reduced, the brokerage sector was categorized into two groups: full service brokerage firms and discount brokerage firms. The difference between the former and latter firms is that the former offers informative stock reports and a level of service much higher than the latter whereas the latter firms only commit themselves to execute what their clients order. Additionally, as the name goes, the big brokerage firms provide a full range of services such as advising the clients on possible market movements, giving an insight to the clients that which stock would suit their game plan and guiding the investors through the times of market volatility and so on.2 2The better customer service results in higher commission fees but investors are closer to getting higher return on their investments. Key Statistics of the Industry As the brokerage industry is also exposed to U.S subprime securities trades, the industry also suffers from big losses in their values. The market value of the brokerage sector shrank by 32% from 2007 to 2008 and reached to the amount of 57.4 billion. However, the value was up 20% from the year 2004 to 2008 according to the statistics. The numbers are calculated based on CAGR (compounded annual growth rate) method. Global Brokerage Sector Value Year 2004 2005 2006 (in billions) 46.3 53.0 69.0 14.5 30.2 % Growth

1 2

2007 2008

84.4 57.4

22.3 -32.0

Figure 13 Stock broking companies benefit mainly from commissions received from their investors and the rest profit comes from buying the sto


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