A Case Study in Transforming of Retail Stock Trade

A case study in transforming of Retail Stock
Trade
Retail Stock Trading and
Brokerage firms
Retail Stock Trading is a service where
companies/ brokers facilitate the buying and
selling of stocks in the market by investors.
Legislations in US require that registered

brokerage firms must act as a agent between the
investor and the financial markets.
This is where brokerage firms like Merrill Lynch

and Schwab come in.
Until 1975, the brokerage firms in US had their

commission fixed by the government regulators.
Merrill Lynch: A Case Study in transformation of Retail Stock
Trade
Hence the retail brokerage industry’s core
product, stock trading, was largely an
undifferentiated commodity.
In order to differentiate themselves, established

brokers competed by offering proprietary bundles
that include complimentary components to the
trade, such as research and personalized
investment advice.
Deregulation in 1975 launched discount

brokerage firms that charged lower commissions,
butLynch:
Merrill didn’t
A Case provide investment
Study in transformation of Retail advice.
Stock Trade
The end of fixed commissions led to two
market segments for trading securities:
Traditional investors who wanted their services

provided by a full-service broker.
Self-directed investors who only needed trade

execution services from a discount broker.
Merrill Lynch
It was a traditional full service brokerage firm.
It occupied a comfortable position as the largest

brokerage firm in the world.
It had more than 60000 employees in 40 countries as

well as a relationship with more than 5 million
households.
The company had more than $1.5 trillion in assets

under management and institutional trading tops $30
billion a day.
It had around 17000 retail stock brokers
Trade
Business Model
Merrill’s business model consisted of full service
brokerage which included all services from
brokerage to investment advice.
Its services extended beyond retail brokerage

services. It provided institutional trading and
investment banking services amongst others
It had a research department that produces

research products for the brokerage workforce.
Brokers provide clients with research and

encouraged them to place trade with Merrill
Lynch.
Merrill Lynch: A Case Study in transformation of Retail
Stock Trade
The firm earns revenue primarily from
Commissions
Underwriting
Fee based account management
And a variety of other sources

Trade
Growth of self directed
investors
Self Directed investors are investors who only
need trade execution service from the brokers
and not investment advice.
Internet helped in their growth by allowing

brokers to charge very low levels of
commission
Large amount of content on the net made it

easy for investors to conduct research
themselves, often for free.
Trade
Disintermediating of
Industry
Because of regulations it would be difficult for
investors to directly interact with the exchanges.
However with the onset of internet, minimal human

interference existed between the investor and the
exchange.
A customer of one of these firms can enter an order

directly into his/her computer. Without human
intervention, the online broker’s computer route the
orders to the market for execution.
This diminished the role of the broker in the stock

trading transactions.
Trade
Organizational issues
Merrill Lynch’s plans for embracing internet
business model faced opposition from its
17000 brokers.
This was because they felt that trading on

internet had the potential to drastically reduce
the commissions which would reduce their
pay.
Apart from this, Merrill Lynch was extremely

successful company and on top of the industry
Trade
Other Issues
Loss of market capital due to perception
amongst the people that Merrill Lynch did not
understand the internet and hence cannot do
well in it.
The increasing competition from online

discount retailers like Schwab.
For eg: Although Merrill’s assets grew by

around 10%, the assets of Schwab grew by
40%
Trade
Merrill Lynch: A Case Study in transformation if Retail
Stock Trade
Merrill Lynch was among the late entrants
into the online stock trading market.
It initially sought to counter the challenge of

internet brokers by offering certain online
services like free
It also sought to dramatize “dangers of buying

and selling stocks unassisted over the
internet” through a public campaign.
Stock Trade
But the popularity of e brokerage kept on rising.
As customers flocked to e-brokers, the firm faced

an 85 % compression in its margins.
In late 1998, Schwab’s market value exceeded

that of Merrill Lynch .
This was the single largest event that motivated

Merill Lynch to adopt the Internet and change its
business model.
Trade
Initially were very apprehensive about the
internet broker model, but later on as the demand
for online broker soared high they also had to join
the wagon.
Merrill Lynch began by offering free access to its

stock research over the web for a 4 month trial
period.
Merrill later offered online trading at fees of

$29.95 matching Schwab.
 This web service allowed individual to set up

online accounts to trade stocks, bonds, and
Merrill Lynch: A Case Study in transformation if Retail
mutual fund, and eventually stock options.
Stock Trade
Customer could obtain complete reports on their
holdings and transactions, pay bills and handle
other financial tasks through Merrill Lynch.
It introduced a new account called “Unlimited

advantage” to spread fee based accounts among
customers.
For a percentage of the assets, starting at $1500

fee per year, the account holders could access all
of Merrill’s online services and as many trades as
they want, electronically or through a broker.
Trade
Hence the Internet forced Merrill Lynch to
change its business model that concentrated
commission based revenue to one that
focused on fee based revenue.
It removed Merrill’s dependence on

commissions and made them focus more on
other services.
Although Merrill Lynch expected to lose $ 1

billion, it hopes to make it up in fees and
Stock Trade
Role of Internet in
Transforming
Retail Stock Trade
Internet has transformed existing industries
and also created new ones. Internet enabled
transformation can:
Improve the effectiveness of the organization

Lead to new organization structure and
relationships with other firms
Reduce overheads
Lead to strategic advantages

Stock Trade
Impact of the Internet is very well illustrated
here in the case where Retail Stock trading
was completely transformed by the use of
internet.
In the mid 1990s, when the first e-brokers

appeared, the use of IT and the Internet
provided online brokers with a significantly
lower cost structure than full-service brokers.
For example, online brokers do not require

physical branch offices and large no. of
Stock Trade
Thisallowed them to drastically reduce the
commission charges.
The availability of information online for free also

diminished the importance of research services
provided by traditional full service firms.
This lead to increase in directed investors
Internet also enabled the disintermediation of

retail stock trading.
Stock Trade
IT has changed the nature of retail stock
trading and full service brokerage business
model forever.
In a few years, few customers will be left for

the full commission broker.
They will have to adapt to low commission

trades or fee based services.

Stock Trade

A Case Study in Transforming of Retail Stock Trade

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A case study in transforming of Retail Stock

Legislations in US require that registered

This is where brokerage firms like Merrill Lynch

Until 1975, the brokerage firms in US had their

In order to differentiate themselves, established

Deregulation in 1975 launched discount

Traditional investors who wanted their services

Self-directed investors who only needed trade

It occupied a comfortable position as the largest

It had more than 60000 employees in 40 countries as

The company had more than $1.5 trillion in assets

Its services extended beyond retail brokerage

It had a research department that produces

Brokers provide clients with research and

Fee based account management

And a variety of other sources

Merrill Lynch: A Case Study in transformation of Retail Stock

Internet helped in their growth by allowing

Large amount of content on the net made it

However with the onset of internet, minimal human

A customer of one of these firms can enter an order

This diminished the role of the broker in the stock

This was because they felt that trading on

Apart from this, Merrill Lynch was extremely

The increasing competition from online

For eg: Although Merrill’s assets grew by

It initially sought to counter the challenge of

It also sought to dramatize “dangers of buying

As customers flocked to e-brokers, the firm faced

In late 1998, Schwab’s market value exceeded

This was the single largest event that motivated

Merrill Lynch began by offering free access to its

Merrill later offered online trading at fees of

 This web service allowed individual to set up

It introduced a new account called “Unlimited

For a percentage of the assets, starting at $1500

It removed Merrill’s dependence on

Although Merrill Lynch expected to lose $ 1

Improve the effectiveness of the organization

Merrill Lynch: A Case Study in transformation of Retail

In the mid 1990s, when the first e-brokers

For example, online brokers do not require

The availability of information online for free also

This lead to increase in directed investors

Internet also enabled the disintermediation of

In a few years, few customers will be left for

They will have to adapt to low commission

Merrill Lynch: A Case Study in transformation of Retail

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