House Subcommittee Examines Investing On-Line

(June 19, 1998)  The House Finance Subcommittee held a hearing on Thursday to examine electronic trading of securities and bonds.  The hearing featured live demonstrations of actual electronic trades, with the screen of the computer monitor projected on the wall of the darkened hearing room.

The hearing was part of an ongoing series being conducted by the House Commerce Committee, and its subcommittees.   This hearing was conducted by the Finance Subcommittee, which is chaired by Rep. Michael Oxley (R-OH).

Commerce Committee Chairman Tom Bliley (R-VA) stated that "competition in the on-line brokerage business has escalated to the point where the fees for trading a block of securities can cost no more than a tank of gasoline.  This competition has flourished because no significant new regulatory hurdles have been imposed."

Rep. Oxley stated that "on-line investing, according to many experts, has been the biggest success story on the Internet. Some analysts have projected that on-line trading will account for nearly one third of all customer transactions this year."  He said this about the role of government:

"These developments raise as many important policy questions for regulators and for Congress as they do opportunities for investors and entrepreneurs. We must be vigilant to ensure that our regulatory scheme provides the flexibility that is necessary to encourage the innovation that has brought so many benefits to investors and entrepreneurs, while preserving the efficiency, fairness and openness that are the hallmarks of our nation's capital markets."

The Committee heard from five witnesses:

Julio Gomez stated that "as of April, 1998, there were more than 70 firms brokering on-line. ... There are now 7 brokers offering sub-$10 commissions."   He added that "investors are flocking to on-line brokerage for the convenience and low priced commissions available available for self-directed trading activity."

Martha Deevy, who oversees Schwab's 1.6 Million customer online accounts, and nearly $2 Billion in on-line trades each week, stated that "online brokerage is one of the first industries to conduct business successfully over the Internet.  Online brokerage creates tremendous value for investors by providing instant access to current market news, quotes, account balances, trading, SEC filings, consensus earnings estimates, stock price histories, analytical tools, insider activity and industry reports."

According to Deevy, on-line brokerage allows investors to benefit from lower costs, better access to information, convenience, and control.

Deevy made several policy recommendations, including passing of the Internet Tax Freedom Act, working with the Securities and Exchange Commission to require the stock exchanges to lower the price of real-time quotes, and passing uniform electronic signatures legislation.

The ITFA is particularly important, said Deevy, because "an investor that lives in one state and places a trade while on business in another state could conceivably be subject to two taxes on the one transaction.  This example becomes more complicated when you add on the very common occurrence of interacting with an Internet Service Provider in a third state, a broker in a fourth, and an exchange in a fifth state.   Clearly such taxing schemes would greatly impair the continued growth of the Internet.  These kind of taxes would be especially burdensome for investors who are already subject to capital gains and dividend income taxes."

In response to questioning from Rep. Oxley, Deevy also stated that privacy and encryption standards are best left to industry.   Rep. Billy Tauzin (R-LA) also questioned the witnesses about encryption.

Instinet CEO, Douglas Atkins, also testified regarding legislation and regulation affecting on-line trading.  "The dramatic growth in electronic commerce generally, and of technology in the financial markets in particular, creates new opportunities for investors as well as new challenges for Congress and regulators.   The question is how to incorporate and encourage new developments while simultaneously setting forth a structure and a regulatory regime that will protect investors and ensure the continued viability and integrity of the US securities markets."

He further stated "that regulators should draw any regulatory lines based on the fundamental business practices market participants perform and the services they offer, rather than on the technological means by which they deliver their services."

Joseph Fox demonstrated two live stock transactions on the Web Street website.   The investor's screen displayed current account information, live quotes, news, and trading options.  Fox bought ten shares of Compaq and ten shares of a company located in Rep. Oxley's district.  Each transaction cost $14.95.

The members of the Committee who participated in all or part of the hearing included, Mike Oxley (R-OH), Billy Tauzin (R-LA), Steve Largent (R-OK), Rick White (R-WA), Barbara Cubin (R-WY), Tom Bliley (R-VA), Ranking Member Tom Manton (D-NY), Edward Markey (D-MA), and Diana DeGette (D-CO).