K H A L E E J T I M E S | A DV E RT I S I N G S U P P L E M E N T | T h u r s d a y, A p r i l 2 5 , 2 0 1 3
Revolution in global finance Online trading enables millions of retail investors all over the world to trade shares in their local or global stock exchange at a fraction of the cost Matein Khalid
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he spectacular growth of online trading coincided with the technology/internet stock bubble in the late 1990s and spawned a revolution in Wall Street and even global business culture. Online trading platforms enables untold millions of retail investors all over the world to trade shares in their local or global stock exchange at a fraction of the cost charged by traditional offline brokers. Research once limited to only institutional investors and high net worth private client is available online to the clients of a new generation of electronic intermediaries in the financial markets in real time. Access, instantaneous execution, the availability of research and technical charts, access to global markets and, above all, empowerment to trade and invest on a scale unthinkable before the advent of the Internet. AOL and Compuserve created the world’s first retail online trading products. Pershing Corp, now a unit of the Bank of New York, created the world’s first PC based electronic share trading high speed clearing systems in the early 1980s. While Black Monday in October 1987, the savings/loans and Latin American debt crises and Saddam’s invasion of Kuwait created hyper-volatile, bear markets, the birth of the Internet era (the IPO of Netscape on August 9, 1995) led to an exponential rise in online share trading. Brands such as E-trade, TD Ameritrade and Datek entered the constellation of regulated Wall Street financial brokers.
Charles Schwab, America’s largest discount stockbroker with a national network of branch offices, was not slow to embrace the online trading revolution. Ameritrade emerged as a serial acquirer of online brokerages in North America. The first online brokers emerged in India, the UAE and across Asia. A milestone in the industry was when Charles Schwab opened its one-millionth online account in 1997. A price war among the world’s leading online brokers was inevitable, led by Scottrade’s offer to trade New York Stock Exchange or NASDAQ shares at $7 per share. This was inevitable since the world’s number of registered online brokers soared more than tenfold in the last decade of the twentieth century on the eve of the epic Silicon Valley tech bubble bust. Retail investors and online trading played a major role in the parabolic rise of global stock indices in the late 1990s, as volumes rose exponentially in stock exchanges as varied as the Mumbai Stock Exchange, Hong Kong, Dubai’s DFM and Saudi Arabia’s Tadawul. Online trading had created nothing less than a new paradigm shift in the global financial markets. This was because electronic platforms converted an expensive, restricted information, broker driven stock brokerage model into an open access, consumer
driven, online trading and risk management on a planetary scale. The macroeconomic impact of the online trading revolution was significant. Transaction costs plummeted. The number of new clients rose. New platforms emerged all over the world. Cross-border flows surged and global financial integration deepened. Above all, online trading led to a quantum increase in investment knowledge by millions of retail investors all over the world who had never before accessed Wall Street. Online trading’s next frontier is mobile apps, the cloud and vast global, cross-market trading platforms such as Interactive Brokers. Apart from shares and bonds, online brokers now enable retail investors to buy and sell offshore mutual funds, ETF’s, futures and options, currencies and even precious metals. Even Bloomberg, the financial media colossus has developed its own electronic trading product trade book. Online trading technologies have a seismic impact on the $4 trillion daily turnover in the highly liquid, hyper-kinetic global foreign exchange market. The emergence of online trading platforms has enabled individual investors all over the world to access tight two-way pricing and real time market intelligence once only available to sophisticated inter bank traders or corporate treasurers in the world’s financial hubs. As foreign ex-
change volumes surge, online has helped make this the world’s largest, liquid asset class and a financial market that most closely resembles the classic economic model of perfect competition. While the origins of foreign exchange trading go back to Renaissance Florence (the Medici banking empire created Europe’s first interbank currency market via its nostro accounting and its ability to leverage financial intelligence from its cross-border network for profit) and Rembrandt’s Amsterdam. Yet the advent of communications technology and the broadband Internet has revolutionised the 500-year-old global currency market, a market that trades continually from sunrise in Singapore to sunset in Manhattan, — in fact, sunset in San Francisco. Online currency trading now encompasses spot, forward, futures, swaps, exotic, cross and non deliverable forward (NDF) products for currencies subject to capital controls/restrictions such as the Indian rupee, Chinese yuan and Thai baht. Online trading has been as significant a phenomenon in the history of global currencies as the collapse of Bretton Woods, the invention of the currency futures contract on the Chicago Mercantile Exchange and the Reuters 3000 Interbank Dealing System. As dollar interest rate has plunged due to Federal Reserve money printing, UAE investors earn negative inflation adjusted returns on their cash/bank deposits. Moreover, Dubai has emerged as the Gulf’s preeminent financial hub, attracted a new breed of entrepreneurs and global investors to its shares. It is thus imperative for online brokers in the UAE to evolve beyond the pure execution or day trading model, to offer clients more intellectual products in the area of portfolio strategy, asset allocation and risk management. Moreover, online brokers have huge opportunities in niche areas such as Gulf equities, Islamic finance, Middle East bonds/sukuk and securitised property products. Investor education, global access, transparent and competitive pricing, product innovation and regulatory compliance are mission critical to build successful online trading brands in the UAE.
The ‘science’ that is economics Paul Samuelson’s words couldn’t ring truer in the present economic scenario Gaurav Kashyap Paul Samuelson once said that economics has never been a science and it is even less now than a few years ago. With global central banks engaging in aggressive monetary policy, the EU prepping for the next great Greek tragedy, growth forecasts slowing amidst the emerging economies and with the US sequester in full effect, Paul Samuelson’s words couldn’t ring any truer these days. Despite the buffet of deteriorating economic conditions globally, equity markets continue to march to their all time highs. Go eat your heart out Samuelson. The most recent US jobs report, which forms the backbone of the US recovery, came in at an anaemic 88K new jobs added in March — less than half of the lowest estimate on Wall Street, and the weakest gain in nine months. Despite confirming the obvious effects of a sequestration hangover, March’s jobs report also boosted prospects that the Federal Reserve would be forced to continue its unprecedented $85 billion-a-month easing measures. And with it, further underpinning the entrenched bearish sentiment for the US Dollar, along with contributing to the next big equity bubble in stocks. Keeping this in mind, what does this entail for the Indian rupee? USDINR has been trading in a range between 53.60 and 55.15 over the past few months and will continue to con• Turn to next page