BULLISH ON THE WEB

	June 2, 1999
	Joseph Nocera, author and editor-at-large at Fortune magazine, and John Battelle, president of The Industry Standard, a weekly magazine that covers the Internet and the economy, discuss the growing world of online trading. Merrill Lynch, the nation's largest stockbroker, announced yesterday their latest move to offer a low-cost brokerage service for customers online.

MARGARET WARNER: Finally tonight, online investing, and to Elizabeth Farnsworth in San Francisco. ELIZABETH FARNSWORTH: The nation's largest full-service stock broker announced yesterday that it will offer a low-cost brokerage service for customers wanting to trade directly online. SHOUTING ON FLOOR OF STOCK EXCHANGE: X-W-J! ELIZABETH FARNSWORTH: Merrill Lynch has long regarded the advice its more than 14,800 stockbrokers offer as the key to its success. Starting in December, Merrill Lynch customers can bypass the brokers and buy and sell online any time of day or night for $29.95 per trade. The company currently charges an average of $80 to $100 in commissions for regular trades. The new service will be available only to customers who have at least $20,000 in a Merrill account. With this move, Merrill Lynch joins discount traders like Charles Schwab and E-Trade and traditional brokerage firms like Donaldson Lufkin Jenrette and Morgan, Stanley, Dean Witter, which also offer Internet trading. Merrill Lynch's strategy reflects a boom in Internet use for financial services. More than seven million Americans already trade online and more than one-third of all individual trades take place in cyberspace. ELIZABETH FARNSWORTH: For more on this we turn to Joseph Nocera, editor at large at "Fortune" Magazine and author of the book "A Piece of the Action: How the Middle Class Joined the Money Class;" and to John Battelle, president of the "Industry Standard," a weekly magazine that covers the business of the Internet. John Battelle, if I wanted to invest online with Merrill Lynch under this new program, how would I do it? JOHN BATTELLE: Well, the first thing you're going to have to do is be online, which to many people is not simple. It's one of the reasons AOL got so big, because they made it easy. Once you get online, it's relatively easy to then, particularly if you're already a Merrill Lynch customer, transfer funds to the online brokerage and start trading. ELIZABETH FARNSWORTH: But not yet, right, beginning in July? JOHN BATTELLE: Beginning in July. And there are some restrictions on that. Then they're going to roll out in December. And this is definitely a reaction to the amazing success of some competitors that didn't exist two years ago. ELIZABETH FARNSWORTH: And there are two programs. You can pay for it each trade, or you can pay a minimum of say $1,500 and then you get advice, right? JOHN BATTELLE: Correct. ELIZABETH FARNSWORTH: You can get advice from the brokers. JOHN BATTELLE: You can get advice. They're not adding advice for the lowest cost, which in my opinion might be a mistake, because there's lots of advice for free now on the Internet. ELIZABETH FARNSWORTH: And what's new about this? They did have program, a limited program online, right? JOHN BATTELLE: Well, it was a very limited program where you could get access to your account and research for particular net-worthed individuals at Merrill. This is a roll-out and a real play to get to the broader market. ELIZABETH FARNSWORTH: Joseph Nocera, what is behind this move? Why did Merrill Lynch do this? JOSEPH NOCERA: Well, there's no question that Merrill feels pressured by the power of the Internet. And there are several events that you can think about. One is the incredible success Schwab made this move very quickly. They are a discount broker. They moved to the Internet quickly. And as of last December, they had a higher market capitalization in the stock market than Merrill Lynch. In other words, the stock market was saying Schwab is a more valuable company than Merrill Lynch. But the second reason is that Merrill Lynch has been losing customers to the Internet. Savvy customers who want to go that way, who feel that it's easy, who feel that they're flooded with information on the Internet just decide, why should I be spending $100 or $200 for trade when I this k do this trading myself cheaply. It also speaks, by the way, to the country's obsession with the market, which has played very much into the growth of the Internet. And Merrill Lynch doesn't want to lose out as Americans become, you know, just completely obsessed with the stock market. ELIZABETH FARNSWORTH: Does this mean that brokers, John Battelle, will have much less of a role? JOHN BATTELLE: Well, I think what it means, and certainly what Merrill Lynch has figured out with this move is that you have to disaggregate the selling process of selling stocks with the selling financial advice. And financial advice is one product. Another product is the ability to execute a stock transaction. With traditional brokerage houses, those two have been coupled. This is sort of the first step in uncoupling that and to actually leveraging for Merrill Lynch 14,000 people who know how the market works. It remains to be seen if they're actually going to be able to sell them distinct from their ability to create the transaction. That's the challenge for Merrill. ELIZABETH FARNSWORTH: You mean sell them as advisers. JOHN BATTELLE: As advisers, which is something that Schwab has done. And the E-trades of the world don't have a huge army of people to advise their customers. But they do have access to a lot of research, a lot of information and sort of that individualistic ability that Americans love to find out for yourself and make a decision and get the transaction done without a broker -- in the words of E-Trade -- getting in the way. ELIZABETH FARNSWORTH: All right. Joseph Nocera, what's the significance of this? This was on the front page of some of the major U.S. papers here. Why is this a big deal? JOSEPH NOCERA: Well, for a lot of reasons. One is it's just the further proof that individual investors -- the world has changed over the last 20 years, and individual investors have taken more and more control over their financial life. And as that's happened, even though full-service brokerages have done extremely well, they can feel that their world is changing. It's changing partly because of the Internet and partly because of the attitude about individual investors towards buying and selling stocks. But the second reason is, Merrill -- this is a big company. This is a company that has almost a trillion dollars in assets of America's. It moves slowly. And it has for the last 50 years before a company that has been driven by one desire, which is we need to keep our brokers happy. This is a move that will infuriate and already has infuriated the 14,000 Merrill Lynch brokers. It's taking money of out of their pocket. And to me the real significance is, is that it shows the power of the Internet to force major profitable companies to change their ways to adapt, because you know in their hearts of hearts, Merrill really doesn't want to do this if it doesn't have to because it doesn't want to have to anger its own sales force. That to me is the real significance. ELIZABETH FARNSWORTH: John Battelle, you're nodding your head. Do you agree? JOHN BATTELLE: Absolutely. I think that Merrill Lynch in many ways was a canary, and by that I mean that people were waiting for this to happen. They've been waiting for two years. Two years ago the vice chairman of Merrill Lynch got up before a industry conference and said bad idea; online trading is a bad idea; you're going to lose your shirts; you need an adviser; you need to be coupled to large, secure company like Merrill Lynch. We're never going to do this. This is a bad idea. Now, you know, they've come around. And I think for two years the industry -- the Internet industry has been waiting for that to happen. And when you see a big company like Merrill Lynch reacting this way, you've got to think, well, what's happening with the Mercks of the world, the Johnson & Johnson's, the Fords, you know, the big Fortune 50 companies and what their strategies are for success in a economy that is defined by the Internet opportunity as opposed to an economy defined by an industrial revolution. So there's that kind of a shift going on. ELIZABETH FARNSWORTH: So you see this as going way beyond the securities industry? JOHN BATTELLE: Absolutely. Every industry sector is being affected by the potential, the opportunity, and the threat of what the Internet represents and reacting to that is really on the minds of all corporate CEO's right now. ELIZABETH FARNSWORTH: Joseph Nocera, you've written a lot about the history of this. And you said the way people invest individually has changed. Why? And how does it relate to this? JOSEPH NOCERA: Well, one reason it's changed is because we've been in a bull market since 1982. And you know, people who didn't care much about the stock market in the 1970's and even in the early 80's have gradually become more and more interested in the stock market. And I think what you've seen in the last four or five years is an obsession with the stock market that borders on the unhealthy. I mean, I know in my little town that live in, you know, I can't walk down the street without having a conversation with somebody about the stock market. I think that is part of it. There are, you know, in terms of history, I mean, basically, in the old days, you had no choice. You had to go to your broker. It was a controlled world. And the broker had the power. And the only way you could buy stocks was to go to a broker, to pay a full-service commission to get his "advice." In fact, there were -- federal securities law says that a broker is not allowed to make a trade for you unless he understands your needs. The rise of discount brokering in the 70's is a hugely important event because it was the first time individual investors could break away from the broker and do it themselves. And Schwab has built on the whole idea of do it yourself. Along comes the Internet. And it gives you a new way, an easier way, and actually a more private way even when you think about it to do it yourself. And what it's enabled people to do is roll out of bed, watch CNBC, you know, squawk box, trade - you know -- start putting in their trades at 9:30. Lunchtime comes, you know, make a few more trades. At the end of the day, make a few trades. And we've even gotten to the point, which I think is a little insane, that the New York Stock Exchange and NASDAQ are now going to open for evening sessions so they that people can trade stocks at night. And you start to think of yourself, well, you start to think to yourself, when are people going to have time to live their lives if all they're going to do is spend their time trading stocks. But that's the point where we are right now. ELIZABETH FARNSWORTH: Okay. Other than that, not having time to live our lives, what's the downside to this? There's always the worry about the online trading adding to the volatility of the stock market, right? What else? JOHN BATTELLE: Well, I don't think there's any question it's added to the volatility. I think overall that's a good thing, in the overall scheme of things. However, you know, the fact is, you can come in with a lot of money and lose a lot of money very quickly now, as easily as you can gain a lot of money. So the downside is that potentially a lot of poem can come and get into something they don't understand. That was Merrill Lynch's position two years ago. I think that fundamentally there is a sound - you know -- opinion there, which is, you don't want to get into this stuff without knowing what you're doing. You do need good sound financial advice, or you need to do your own studying and play with money that you can afford to risk. Nothing has changed in that matter. The Internet doesn't change that formula. It just makes the barrier to entry less of a hurdle. ELIZABETH FARNSWORTH: Uh-huh. And, Mr. Nocera, just in a few seconds we have left, the down side? JOSEPH NOCERA: Well, you know, basically, people at this point think that investing is easy, because the market has just gone up. And the Internet makes it feel even easier and makes people feel even smarter because their stocks are going up. At some point, stocks are going to go down, I don't know when. And when they do, people will realize this is a lot harder than it looks. ELIZABETH FARNSWORTH: All right. Well, thank you both very much. JOHN BATTELLE: Thank you. JOSEPH NOCERA: Thank you.