The Evolution of Online Brokerage Services

The era before online trading

You might think that getting access to an online brokerage in an instant was easy since the beginning. That’s not the case. In fact, before the internet reshaped retail investing, placing a trade was quite the hassle. You needed to call a full-service broker and he would be the one that executes the trade in your behalf. And naturally, he would take a commission from your side.

Access to market data, research, real time price quotes, all of that was restricted to institutional investors and brokerage firms. That structure was good for a while, but clearly it had major limitations. You had a very high barrier of entry, and as a beginner you would not have access to the market data. Plus, having the broker investing instead of you meant that you had your hands tied, which wasn’t exactly the approach that most traders wanted to have in the first place.

Then, after a while, the first online discount brokerage services started to appear. It was during the 1990s, when the internet was growing and booming. The period introduced a great value proposition for traders. You would have lower costs, direct market access, and in exchange you would get reduced hand holding, shifting research and decision-making responsibility onto the individual trader. The broader adoption of the internet took this to the next level. During this time, we also saw the introduction of real-time price quotes to retail investors, thus closing a major portion of the information gap that would normally be in favor of the institutional players.

The rise of electronic communication networks

Having faster communication networks made it much easier to buy and sell orders directly. You would have access to such systems, and it would be simple to access the top broker and any market you want. Plus, the execution speed was improved, since orders were connected more directly to available liquidity. It was a great upgrade, and one that definitely started enhancing the way people were trading at that particular time. 

However, the shift towards a more transparent execution model system was a huge differentiator among brokers. For example, regulatory bodies like ASIC and the FCA placed a lot of focus on execution transparency and the best-execution obligations as a part of the larger retail investor protections. It was extremely important, and something that did indeed help improve the brokerage services at that particular time.

Commission compression era

Then, we had a great shift which was the almost complete elimination of trading commissions for stocks, ETFs and many retail products. The shift also changed the way brokers were generating revenue. For a very long time where they were focused on per-trade commissions, brokers were not getting interest on cash sweep balances, margin lending and premium research or analytics tools. It was a necessary shift to be honest and one that was able to direct the industry properly, towards new ways of monetizing and shifting away from the unnecessary and rather archaic systems used until that time.

Mobile-first platforms

In the meantime, we saw a huge growth in the mobile platforms. As smartphones became more readily accessible, that meant a lot of brokers shifted to a mobile-first experience. Being able to access info on mobile and trading at any given time, that brought a massive advantage to most traders. 

Of course, matching the mobile interface to the desktop one became difficult, yet things did change quite a lot as time went by. Plus, the industry also had to shift towards the newer investors and their generational changes. Lower minimum deposits, a simpler way of opening accounts and offering educational content, that was specifically the most important thing that you had to take into consideration.

Algorithmic tools and AI integration

As we shift towards the current times, we saw a lot of focus on integrating AI features and harnessing the power of algorithmic tools. The truth is that algorithms can be very useful and they certainly have their use cases. Same with AI, it can study existing data, assess your existing investments and trades, then give you actionable info that you can use. Granted, these are not perfect, nor should you expect them to be. However, the value you can get from them and actionable information, that can be exceptional, and it’s exactly something to take into consideration.

Another thing to note is that we are seeing an expansion into new asset classes. The first major online brokerage services were focused on stocks. However, these days we see more and more asset classes being included. These are things like crypto, digital assets, futures, options, commodities and so on. Having the ability to trade these along with stocks gives you diversification and as we know, that on its own can be extremely handy. Which is exactly the thing to keep in mind here. It offers consolidation that reduces friction for traders, while also making it easy to trade without worrying about separate accounts, for example.

Conclusion

It wasn’t easy to create the first online brokerage services, and thankfully things have evolved quite a lot since then. These platforms are now the epitome of trading, and the fact they offer immediate access to great trading info and educational content is great. However, it’s a good idea to know the evolution of these online brokerages, because it helps you better understand the industry, and figure out what can be improved. Clearly, there’s a lot to learn, and assessing all that info can help you better use these amazing online brokerage services we have now!