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Chapter 2

Q. 2.OA.1

Online Securities Trading with Barclays, E*Trade, Selftrade, and TD
Waterhouse The deregulation of securities markets and the rise of the Internet have brought major changes to the way in which many investors buy and sell securities. For many investors, virtual trading, e platforms, and mobile apps have replaced the traditional stock broker and trading practices. The elimination of ownership restrictions for financial firms also resulted in the acquisition of many stock-exchange members by foreign and domestic competitors. To maintain their leadership in international finance, investment firms quickly focused on innovation and global talent to remain competitive. Once free from regulation, brokers were able to set their own commission rates. The industry could now compete to add customer value through offering a low-cost service. Savvy investors and routine traders, who did not want the advice and research provided by the major brokerage firms, could now execute trades with much lower commission fees. However, the largest impact on brokerage commissions came with the rapid growth of Internet trading to execute securities trades. Thanks to the Internet, firms compete more on price, frequently offering free trades or cash bonuses to lure clients. In addition, brokerage houses now have global reach. Canada’s TD Waterhouse and TD Ameritrade lever their knowledge of discount brokerage to attract clients who demand reliability, speed, low commissions, and the ability to maintain a welldiversified portfolio through access to its research services.  With Internet trading, new competitors, such as E*Trade and Selftrade, entered the marketplace. Operating entirely online, each firm competes through service innovation by developing new methods of trading, accessing accounts, and providing research. Quality in terms of accurate trade execution and confidentiality is another way to add customer value. Differences in services and quality, however, are difficult to maintain because other companies can quickly duplicate these efforts. For example, Selftrade focuses on execution-only trading, flat fees, and its awardwinning service. E*Trade points to its lower prices relative to those of its major competitors and its innovative trading tools. Therefore, purely online brokerage houses compete extensively by offering low commissions on securities trades. Given low barriers to entry and the resulting increased competition, online trading provides a low-cost and quick way to buy and sell shares. Alternatively, Barclays has been in the banking business for over 300 years with more than 140,000 employees in its global operations. Its Barclays Wealth and Investment Management division offers multiple services including estate planning, investment banking, foreign exchange trading, investment research, and trade execution. Its Barclays Stockbrokers division provides online services for investors who prefer to manage their investments independently. It offers a less costly alternative to its wealth-management services, yet enables the firm to retain customers who might switch from its full-service offerings to seek alternate services from competitors. Its online trading also builds on Barclays’ early market entry into Internet banking in 1997. E*Trade, Selftrade, Barclays, and TD Waterhouse all attempt to add customer value through different pricing strategies. E*Trade offers tiered pricing, with the more trades executed per quarter, the lower the fixed fee per trade. Selftrade provides trade executions at a standard fee for all trades, no matter the size or number. Barclays emphasizes the scope of its services (trade execution, financial advice, reports, and banking privileges) with account structures matched to investor risk preferences and experience. TD Waterhouse seeks to compete through its superior customer service, user-friendly website, and international brand awareness. Each of these strategies is designed to add value to different types of customers. Organizational value, however, must also be achieved. As the market matures, market differentiation is increasingly important. Low cost is only one factor that customers consider and many are willing to change firms to take advantage of greater convenience, mobile services, special offers, and incentives. What variable and fixed cost structures for securities trade execution are likely to exist in these companies to be consistent with their market and pricing strategies? How will the changes in the structure of commission fees affect the ability of both old and new competitors to implement a successful strategy in the long run?


Verified Solution

Firms with higher fixed costs, such as full-service brokerage houses, are likely to develop pricing strategies to cover the fixed and variable costs of their operations. Fixed costs relate to the higher infrastructure costs of these firms. Clients can be differentiated according to pricing schemes based on the level of service that they demand. Online trading firms have lower infrastructure costs and are more likely to pursue a low-price strategy to capture customers who will trade off higher levels of service for lower costs. As firms try to compete in the long term, clients likely will become more demanding and expect firms to offer more at lower prices. In the long run, as commission fees drop, both existing and new firms will have more difficulty in competing successfully. Commission fees might be pushed lower to capture market share at the expense of long-term profits. In the end, successful firms will need to implement a strategy that delivers customer value in other ways, such as financial advice and banking privileges.