The dotcom boom and the stock market

By: Karol Hernandez & Garrett Feldman

The advent of the internet revolutionized the way businesses communicate with customers, how customers make buying decisions, how buyers share experiences and feedback with other buyers, how businesses compete with other businesses, etc. Entire industries along with their customers experienced a paradigm shift.

Though the concept of the internet dates as far back as 1962, when an MIT professor envisioned a “Galactic Network”, it wasn’t until 1995 that it became public domain. Inventions like the telephone, the fax, the radio, and the computer set the stage for incredible capabilities that the integration of these tools with the internet could bring to the modern world.

In 1999, Commissioner Laura S. Unger from the U.S. Securities and Exchange Commission gave a speech on the impacts of the internet on the stock market. The resonating theme of Commissioner’s Unger speech was: “Will the internet be the end of the stock market as we know it?” This was a very valid question at the time considering the fact that between 1995 and 2000 the NASDAQ rose five fold as a result of the dotcom boom.

Commissioner Unger clearly identified the reasons behind the success of the internet in the stock market and why it could potentially change or eliminate the trading floor model.  The technology behind electronic trading is very cost efficient making the entry of new startups into the business more feasible; furthermore the cost efficiencies of such technology have changed the dynamics of the trading floor itself.

On the traditional exchange floor model limitations were placed on off the floor traders, as they missed the advantages of physically being at the floor at the time of trading. Being online however eliminates the barriers of physical space since all traders share a common cyberspace and time. The same principles eliminate the limitations placed by geography, a trader can be anywhere in the world and still participate in trading activities. Yet another barrier brought down by the internet is how many of traders on the floor at any given point in time, no physical constraints placed by a brick-and-mortar model mean more traders can participate in the exchange.

The General Accounting Office of the United States (GAO) prepared a report on online trading in May 2000 as per Congress’ request. The purpose of the report was to provide the outline for protection on brokers’ websites; as the rapid adoption of the internet in the stock market created an impendent need for regulation. How fast was internet usage growing in the exchange industry? From the last quarter of 1997 to mid-1999, the number of broker-dealers offering on-line trading more than doubled. The number of on-line trading accounts established nearly tripled to 10.5 million within the same time frame.  The volume of on-line trades increased to about 37 percent of all retail trading volume in equities and options.

All these rapid changes overtook the stock market in less than a decade. As a result buyers have direct access to sellers and intermediaries are less necessary than they were two decades ago. This has presented a paradigm shift in the industry and has created opportunities for new business models to emerge.

Coupling all the changes in the stock market with the exponential growth the internet has brought to mass media, the digitalization of knowledge and information, the emergence of social media, and the online presence of businesses across industries and countries have created a global market place. A hyper active market place ever ready to respond to fast spreading news about new technological developments, wars in the middle east, economic crises in Europe, nuclear threats in Asia, oil spills in the Gulf of Mexico, press scandals in the United Kingdom, or something as simple as a social network’s IPO.

 

Sources

http://www.sec.gov/news/speech/speecharchive/1999/spch288.htm

http://news.bbc.co.uk/2/hi/business/5235332.stm)

http://www.gao.gov/new.items/gg00043.pdf

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