It wasn't all that long ago that online brokerages like E*Trade (ET) started reshaping the investment world in a decidedly egalitarian manner. However, after the 1996 launch of etrade.com, most everyone knows what happened next. The stock market, driven by the "irrational exuberance" of individual investors and the tech industry boom, went on an historic run right up to March, 2000. Then the tech bubble burst, lots of people took a bath financially, and investors went slinking off into real estate or whatever else seemed like a safer bet.
Guess what? They're starting to come back. While few observers figure that small-timers, the gurus on Wall Street, the tech industry, or anyone else is quite ready for another long run of the bulls, some signs show that individual investors, spurred by easy-to-use technology on their PCs and their wireless devices, are creeping back into the market. In the first quarter of 2005, E*Trade alone handled $134.8 million worth of trades per day, up 65% from two years earlier.
And Wall Street investment houses, which have always been willing to experiment with new technology -- from teletypes to open-source software -- now see it as a competitive weapon. In fact, TowerGroup, a research firm that specializes in financial services' use of technology, expects the American industry to spend $117.8 billion on information technology this year, a $5 billion jump over last year.
THE NEXT GENERATION. Even the exchanges themselves are putting their money down on technology. On Apr. 20, the venerable New York Stock Exchange announced plans to buy the 8-year-old computerized exchange Archipelago (AX). Two days later, Nasdaq announced plans to acquire the last remaining independent electronic exchange Instinet (INGP) for $1.88 billion. Even though an NYSE insider group is said to be mulling an offer for the Big Board aimed at undoing the Archipelago deal, it's clear that electronic is the direction more and more trading is going.
But what of those individual investors? The boom may be long gone, but they have more tools to work with than ever before. Over the last five years, a new generation of online brokerages like OptionsXpress Holdings (OXPS) has taken online trading to new arenas such as derivatives. In fact, the first all-electronic exchange, International Securities Exchange (ISE), has grown into the largest equity-options exchange in the U.S. in just five years.
Of course, thanks to improved wireless technology and computer security, more and more of those investors are accessing data in their accounts and making transactions on handheld devices such as the BlackBerry (RIMM) and even cell phones.
BURN-RESISTANT? Does that mean all investors are ready to jump back into the market? Hardly, but with better tech tools in hand, they'll be more informed and quicker on the draw than ever before. And maybe this time, they won't get burned quite so easily.
In this two-day special report, BusinessWeek Online looks at both sides of the investing technology equation -- the latest and greatest stuff on Wall Street as well as what's available to consumers. On day one, we'll unravel the goings on with the NYSE and Nasdaq and talk with a technologist charged with setting JP Morgan (JPM) apart from its peers through cutting-edge mathematical algorithms and new types of software.
On day two, we'll look at the new breed of online brokerages and take readers on a journey from the early days of wireless to today's easy-to-use technology. By Jim Kerstetter, Technology editor for BusinessWeek Online