Evolution Shift
A Future Look at Today
July 11th, 2006

I Shake a Hand of Disintermediation

As regular readers of this blog know, I have been exploring the subject of disintermediation.  It is a dynamic force that has and will be reorganizing our culture and economy.  In an early post on the subject, I pointed out that in the late 1990s the Internet acted as the agent of disintermediation for the travel and stock brokerage business.  It became possible for people to buy and sell stocks on-line at a fraction of the cost they had incurred even years earlier.  This helped launch the day trading phenomenon.

Well, it now seems that the last bit of disintermediation is going to occur in the on-line stock trading and investment marketplace.  Today it was announced that a new on-line brokerage company has been launched.  It is called SogoInvest, www.sogoinvest.com and it will offer real-time trades for $3.00 down to $1.00.  That is profound, as all the other major on-line brokerages are in the range of $7 — 12 a trade.  This means that the last step in economic disintermediation has just occurred.

 In addition, this new company will allow investors to buy and sell fractional shares of stock.  For example, if you think Google is a good investment, but you can’t afford 100 shares at $400, you just buy say $3,000 or any amount of Google.  This opens up stock trading and investing to anyone, which is another part of disintermediation, opening a market to anyone that wants to participate.  To that end, there are no minimums to open an account, so literally anyone can now enter this marketplace, regardless of net worth.

[Full disclosure:  I am a partner in an interactive marketing firm, www.bluelinermarketing.com who has been retained by SogoInvest to help launch the new company.  The CEO is named William Yeh, and I have known him now for about 6 months.  That is how I have come to speak with him and per the title above, shake his hand]

In an earlier post, I suggested an updated, four part of the definition of disintermediation:
1.  Disintermediation is the removal of the intermediary person or entity     
2.  If the intermediary remains in place, it will be drained of any excess compensation
3.  Industries that hold information hostage for financial gain will be disintermediated
4.  The Internet can be the agent of disintermediation of existing distribution channels.

During the last ten years, numbers 1 and 3 above occurred in stock brokerage and on-line brokerage in particular.  The launch of SogoInvest brings into play numbers 2 and 4 above.  By going down to $3.00 per trade, or down to $1.00 per trade with certain levels and types of trades, SogoInvest is absolutely draining the remaining excess compensation out of the on-line brokerage business.  As a stand alone business it cannot go any lower.  SogoInvest, by being on-line only, with no offices or store fronts is fully utilizing the disintermediation power of the Internet.  Other players in the space all tend to have offices where their customers can meet with a broker. That is fine, as some people want to shake a hand when making a trade.  For such people these companies are providing a service which is why they charge more.  If all one does is trade or invest on-line or call customer service on the phone, why pay for physical offices that are not used?

The disintermediation of the consumer stock brokerage business can now be summed up in three stages. The first stage began with the deregulation of stock brokerage commissions in 1975, when the Federal Government strop regulating the pricing of stock commissions.  This triggered the first wave of ‘discount brokerages’ such as Schwab, and  led to a lowering in transaction fees for everyone.  The second stage occurred in the mid to late 1990s when the Internet came along and allowed people to get stock market research and buy and sell stocks on-line.  This led to a further lowering of commissions to levels that pretty much existed until today.  The third stage has just been initiated today by SogoInvest, the final step of disintermediation when excess compensation is drained from the intermediaries.

I know William Yeh to be a man who is passionate about lowering costs and providing opportunities for any and all investors, whether they are savvy day traders, professional traders trading for their own accounts or new investors just starting out.  That is what drives him.  Looking at it from a longer, more historical perspective, he and his company are the manifestation of disintermediation in its purest form.

As a futurist, what I see is an idea whose time has come.

 

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