Speech by SEC Commissioner:
Customer Expectations Online:
Are They Your Obligations?
Commissioner Laura S. Unger
U.S. Securities and Exchange Commission
At the American Conference Institute's National Conference on
Securities Trading on the Internet, New York, New York
January 25, 1999
The views expressed herein are those of Commissioner Unger and
do not necessarily represent those of the Commission, other
Commissioners or the Staff.
I hardly need to tell this audience that the Internet is
revolutionizing the securities industry. In fact, online
accessibility has become commonplace. Recently, I met an
individual who had spent the last six months deep in the Congo
filming a documentary on elephants. She could not access food
(and was forced to eat canned goods), but she could access the
rest of the world via her e-mail. Twice a week, she used a car
battery, some wires and a satellite dish to log on to her
computer to receive and send e-mails. She assured me that
individuals who shoot documentaries about elephants in the Congo
do not have brokerage accounts, but that if she did she would
have been able to access it.
Internet trading has become so pervasive since 1995, the
year of the first online trade, that a number of milestones have
passed virtually unnoticed. Before 1995, Internet trading did
not exist. Today, investors can choose from among 100 online
brokers. Trades placed with online brokers now account for 25
percent of all trades on the New York Stock Exchange and Nasdaq.
Still, 1998 has not been dubbed the year of online brokers.
It has been dubbed instead the year of electronic commerce
generally, mainly due to the strength of this past Christmas
buying season. The popularity of online buying proved that
electronic commerce is not some passing fad. The valuations of
all stocks ending in "dot com" reflect investors' love affair
with the Internet.
Online trading is transforming the securities industry in much
the same way that eliminating fixed commissions changed Wall
Street in 1975. Full service brokers and discount brokers
traditionally have offered very different levels of service to
their customers. Now, however, they provide many of the same
types of services due to the lower costs of information. The
ability to quickly sort, analyze, and use vast amounts of
information means that a broker can provide many more services to
its clients on a real-time basis. It also means that the broker
can gather a lot more information about that client. If you
check out a stock quote in the newspaper, no one knows that you
are interested in buying that security. If you check out that
same stock quote online, your broker whether discount or full-
service has the technological capability to know that you are
interested in that stock.
This raises a number of interesting issues. I cannot claim that
any of these issues will be resolved here, but I would like to
suggest some ways of looking at them. First, I think that it is
useful to consider some of the characteristics of electronic
commerce generally, because I believe that where electronic
commerce goes, so will electronic brokerage. Second, I want to
focus on electronic brokerage and discuss my own, rather
unscientific, list of investor expectations. Finally, I'd like
to lay out some of the issues raised by these expectations that I
intend to explore in the coming year.
First, the defining characteristic of electronic commerce in the
future is, in my mind, trust. I started thinking of the Internet
in terms of trust when I participated in a Technology Roundtable
at the SEC last spring. Bran Ferren, of Walt Disney
Imagineering, told the audience that the Internet will fail
unless we can make it a trusted medium where people can believe
in confidentiality, security, privacy, and accuracy.
Most users want to know that someone they trust is on the other
side of the connection, that their transactions are secure, and
that others cannot access their personal information. In a 1998
Georgia Tech survey, about 27 percent of respondents said that
they did not purchase online because they were concerned that
their personal information would not be kept private. Over half
said that they provided false information at least occasionally
when registering with a website. Obviously, consumers are
concerned about online invasions of their privacy.
Second, the successful business model for electronic
commerce depends on driving viewers to a website and keeping them
there. Marketing experts call this "controlling eyeballs,"
becoming a "destination of choice," creating "stickiness" or
"locking in customers." Predictions abound that today's narrowly
tailored websites will be replaced by "virtual communities"
composed of users interacting with each other and multiple
vendors focused on offering services related to a particular
interest, such as gardening or baby care.
A financial virtual community could offer multiple brokers,
banks, mortgage shopping, insurance, tax preparation and estate
planning advice, and financial planning books hyperlinked from a
virtual bookstore. It could have interactive tools, market
commentary, chat rooms and bulletin boards where members could
post stories, provide a personalized web page and real-time
quotes, and offer a range of transactions. That doesn't seem
very far-fetched if you look at the sites of Intuit's Quicken,
Microsoft Money Central, Yahoo! Finance, Motley Fool, as well as
those of some leading online brokers. In fact, you may even be
able to one day pull your various accounts into a consolidated
portfolio on these sites on a "real time" basis.
Third, the potential for economic value in electronic commerce
lies in one-to-one marketing. The fuel that drove the Industrial
Revolution was the ability to mass market identical products.
Henry Ford said that you could have a Model T in any color you
wanted, as long as it was black. The fuel that drives the
Internet revolution today is the ability to segment markets down
to the level of one person, based on information profiles
gathered about the user and thus, mass marketing on an
Amazon.com is a good example of the attraction of
personalized information. Amazon automatically analyzes past
purchases to make recommendations for future purchases that are
personalized to each buyer. You can also personalize your own
purchases on the Internet. For example, you can shop for the
Saturn automobile of your dreams on the Internet. Wouldn't Henry
Ford have been surprised that you can point-and-click your way to
a car and choose from seven models and four colors?
Virtual communities thrive on information. By definition, a
virtual community must both bring a critical mass of members
together and provide useful resources to those members. In order
to accomplish this, virtual communities must gather information
about their members, either through profiles their members
voluntarily provide or through tracking with cookies where their
members go online. This information allows virtual communities
to better target their members and therefore to develop more
precisely relevant products.
A fourth characteristic of electronic commerce is
information access. The Internet can put customers and vendors on
a level playing field. You could think of this as customer
Electronic Brokerage Issues
Putting aside cheap execution, I believe that investors expect
three things from online brokers: convenience, access, and
trust. By convenience, I mean that investors expect to get
information quickly, usually within three clicks and around the
clock. Investors also expect to find all of the information that
they need within one site, as you can see from the popularity of
By access, I mean that investors expect to access a significantly
greater amount of information than ever before. For example,
basic research is becoming such a commodity that it does not seem
to differentiate one online firm from another. One major firm
even decided to give away its research for a brief period as a
way of generating client interest.
I have heard the predictions that the future value for online
firms lies in providing personalized advice to investors, not in
providing commodities such as basic research, information, and
executions. It was over 30 years ago that a smug businessman
told Dustin Hoffman, "I just want to say one word to you just
one word `plastics.'" Well, I suspect, if that businessman
today owned a brokerage firm, he would say, "I just want to say
two words to you `relationship management.'"
Relationship management is the only sure way to bring the promise
of one-to-one marketing from e-commerce to e-brokerage. That's
where trust comes in again. Today, by and large, investors
online want to do it themselves. The market is strong, and
information and opportunities abound. When tomorrow comes and
brings with it more challenging market conditions, I suspect
online brokers will provide added value to customers in sorting
through the deluge of available information.
The increase in access to information by investors has raised
some interesting issues. I believe that brokers should be able
to use the technology from electronic commerce to improve the
efficiency and quality of the information that they provide to
their customers. But brokers should provide that information
responsibly, and investors should use it to trade responsibly.
Information may be a boon to the disciplined investor and a
cautionary tale for the unwary. Imagine the normally
conservative investor who switches to daytrading to save for his
A number of firms have told me that they have a pressing need to
address the issue of what actions online trigger a suitability
obligation. A broker generally triggers a suitability
obligation if it makes a recommendation to a customer. Everyone
here has probably heard about another "graduate" who sued his
broker recently for making unsuitable recommendations after
daytrading his way through $40,000.
The difficult question is when is a broker making a
- Is it a recommendation if a broker makes research and other
information available to a customer based on information gathered
through profiling that customer from his movements online?
Amazon.com certainly does this.
- What if the broker gathers information about the investor
for another purpose, such as to meet its obligations under some
money laundering rules?
- Once the broker has the information for one purpose, such as
marketing, does he have a duty to use it for another purpose?
- What is the online customer's expectation regarding the
information that she gathers? Does the investor know that she is
receiving information that is personalized to her interests?
- Does she assume that this information is in fact a
recommendation by the broker?
- Can a broker make a recommendation through anonymous reps
dealing with online investors?
Let me pose some hypotheticals along what I believe to be a
spectrum of possible situations. Do you believe that a
recommendation has been made in any of these situations?
- First, at the low end of the spectrum, I am an investor and I use
an online broker that provides pure execution with no other bells
and whistles. I am not a daytrader. Maybe I even executed a
trade based on information gathered elsewhere.
- At the second point in the spectrum, I execute trades, plus I
gather information from the broker's "virtual library" (research
reports, market commentary, news). This "virtual library" looks
the same to every investor.
- At the third point in the spectrum, I personalize the broker's
website that I see every day. I have a personalized webpage
called "mybroker" with a quote tracker tracking Internet stocks,
alerts about new technology stock research reports, and a daily
investment newsletter highlighting IPOs in Internet highfliers.
Just to make things interesting, I identified myself to my broker
as a very conservative investor.
- At the fourth point on the spectrum, my broker personalizes my
website based on the information that the broker has gathered
about my interests when I was online. I initially set my quote
tracker to track Internet stocks that I am interested in
following. My website brings market commentary and research
reports about tech stocks to my attention. I don't even know
that the library of information that I see is personalized for
- At the fifth and high end of the spectrum, my broker helps me
manage my portfolio online, either by providing benchmarks which
my portfolio should meet or asset allocation advice for my
Let's look at the facts and circumstances of each case. In the
first instance, the broker is providing pure execution. In the
second and third example, I am targeting the information that I
receive by actively gathering information, either by myself or
with my broker's help. In the fourth example, my broker is
targeting the information that he sends to me by profiling me.
In the last example, my broker is advising me about my portfolio
allocation and performance.
If online investors control the information that comes to their
attention, then one could argue that most online firms today are
merely acting as order takers. If, however, brokers can make the
information that investors see highly personalized based on the
investor profile (whether given voluntarily or not), someone
could well argue, under those facts and circumstances, that such
targeting is a recommendation. These issues clearly concern
online firms whose disclaimers all say that they are not making
recommendations or suitability determinations.
A related issue is what liability, if any, should attach when a
broker hyperlinks to another document. A hyperlink may make it
appear that the linking party has adopted and approved the
information. A hyperlink may make the linking website seem
legitimate. Hyperlinks may also go "deep" into a linked document
and circumvent warnings or explanations. Again, the facts and
circumstances involved will control the outcome.
The quest of online firms for the "holy grail" of relationship
management may clash with privacy concerns. You may think that
investors do not have particular privacy concerns, until you
learn that "spamming" is our number one investor complaint in the
Office of Internet Enforcement. Privacy should concern "good"
firms. One major firm told me that a third of their prospective
customers registered using false information. Clearly, these
customers are going to unusual extremes to protect their privacy.
Similarly, the FDIC received over 3,000 e-mails in one week from
people worried that the proposed "know your customer rules" would
be too much of an intrusion into their financial affairs.
I believe that working to make your customers comfortable with
strategy on electronic commerce, the Clinton Administration
observed that electronic commerce will thrive only if privacy
rights of individuals are balanced with the benefits that arise
from the free flow of information. While the Administration
expressed support for commercial privacy initiatives, it
cautioned that if privacy concerns were not addressed by
businesses, the Administration would face increasing pressure to
step in to ensure consumer choice regarding privacy online.
Online firms should take this issue seriously before the heavier
hand of legislation becomes inevitable.
On a related issue, firms should try to give investors meaningful
notice and information about their privacy practices, not just
create a liability document. The "legal stuff" online seems to
be buried and often overlawyered. One agreement that I found ran
longer than my mortgage document. Would a plain English
agreement that investors can find make for smoother investor
relations down the line? Are firms concerned about investors
being able to control how information gathered about them is
Online brokerage customers are usually portrayed as expecting
merely a quick execution. However, the duty of best execution
requires that a broker seek to obtain for its customer orders the
most favorable terms reasonably available under the
circumstances. Do online customers expect to get the NBBO and
no better? Are they really aware that price improvement
opportunities differ significantly depending on where their order
is routed? Should firms somehow have to disclose this?
Competition between online brokers appears to be moving from
commissions to services. An online broker could compete by
offering order routing to markets with better price improvement
opportunities than competitors. Another way would be to offer
online customers a menu of order routing options. Would offering
such a wide choice of execution venues impact online brokers'
best execution obligations to their customers since the duty runs
from the broker to the customer?
Real Time Quotes
Online customers also increasingly expect access to real-time
quotes. In a traditional telephone trade, the customer did not
make much use of quotes and would rely on a broker to pull it up
when she was considering a transaction. With online trading,
customers want access to real-time quotes.
Currently, online brokers provide real-time quotes for some
purposes (prior to transactions, list of stocks a customer
tracks), but not others (account statements). This is driven in
large part by the cost structure for quotes, which as you well
know, has become quite a contentious issue between the CTA and
Customer demand for real-time quotes will no doubt continue to
increase, and the markets will have to accommodate this demand to
remain competitive. The Commission should not be in the position
of rate maker however. I am confident that we will work for a
fair and equitable resolution that takes into account the
business model of online brokers.
Online customers want immediate and uninterrupted access to their
accounts. Customer complaints about problems with access have
been widely reported and firms have been scrambling to add
capacity. The Division of Market Regulation recently issued a
staff legal bulletin on capacity. The Commission recommended
that brokers follow the Automation Review Policy guidelines it
has required for markets. Do firms need any further guidance or
assistance from the Commission?
Finally, I'm interested in the larger question of what this
increased direct investor access means for the markets. For
example, I am sure that you have all been following the debate
over investing part of the social security trust fund in the
stock market. Are there problems arising today from increased
investor participation that require immediate attention by the
Commission or is it too early to tell? I plan on discussing
these issues going forward in a series of roundtables and would
welcome the opportunity to discuss these issues with any of you.