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Trading stocks by computer isn't exactly new. The basic technology was first used in the mid-'80s by discount brokerages such as Trade*Plus, Charles Schwab and Quick & Reilly, which borrowed the idea from their banking-industry cousins as a way of cutting down expenses. On average, they reduced fees as much as 70%. To keep customers captive, the systems relied largely on special software and in-house investment services. Then brokerage firms like Donaldson, Lufkin & Jenrette began liberating customers by offering an electronic-trading service called PC Financial Network (AOL/Prodigy: PCFN) and making it available through the commercial online services.
But even these trailblazers are being upstaged by discount brokers, like E*TRADE and rival Lombard Institutional Brokerage, that use the wide-open information superhighway to offer lower commissions and inexpensive shortcuts to any investor who has a personal computer and a modem.
No money changes hands over the Net--only the trades are transacted over the open lines. A customer must first establish an account, often with cash or securities to cover trading costs. These accounts can't be accessed through the Internet, so hackers can't penetrate them; the worst they can do is make unauthorized trades. The Internet brokers allow investors to monitor their portfolios, retrieve market data from brokerage databases and link them to other business Websites. Fidelity Investments www.fid-inv.com also lets customers play interactive games, like its Guess the Dow Contest. Says William Porter, the founder and chairman of E*TRADE, based in Palo Alto, California: "The Internet lets us leverage our business in a way that old-fashioned brokerages never thought possible."
Because cyberbrokers maintain little support staff, fewer offices and lower overhead, they can afford to lowball traditional brick-and-mortar firms. WealthWEB www.aufhauser.com) for instance, charges less than half as much in commissions as big brokers. If you were going to buy 100 shares of Wal-Mart at its recent price of $25, Merrill Lynch, for example, would charge $78 for the trade. Some cyberbrokers charge as little as $12. Small investor Raymond Pittman of San Francisco figures he has saved $2,000 to $3,000 in fees since switching from a full-service broker to Lombard Institutional.
One thing to consider when trading on the Net: you're on your own out there. Unlike full-service firms, which emphasize personal service and offer plenty of advice, electronic traders keep contact to a minimum. Many bare-bones Internet brokers do not even maintain a customer-support staff, so if you find yourself inadvertently buying 500,000 shares of Buggy Whip Inc., don't expect help to come running. And those that do have help lines often charge for the calls. Charles Schwab permits customers of its new e.Schwab Internet service one free phone call a month to a human broker. Afterward, they must pay $5 for each call. Investors should also watch out for extraordinary postage and handling costs and indirect expenses such as connection time to services, like America Online and CompuServe.