Thursday, February 06, 2014

Net Neutrality Ruling Could Hurt Small Investors, Brokers

If court’s decision stands, small investors and brokers may have to pay more or settle for less.

Thanks to the recent U.S. court ruling striking down parts of “net neutrality,” small traders could end up paying more for speedy transactions and data, and small brokers could find themselves at an added competitive disadvantage.

The changes would result from the U.S. Federal Appeals Court ruling on Jan. 14 that undermined the Federal Communications Commission’s basic Internet operating philosophy – that no one could restrict lawful network traffic by blocking applications or unreasonably discriminating against a transmission. Verizon Communications challenged the FCC’s position that all traffic had to be treated equally, regardless of its point of origin or intended audience, and won.

As a result, Internet Service Providers (ISPs) such as Verizon can now set up what are in essence high speed lanes for prioritized traffic, according to TD Ameritrade’s John Hart, director of trader product development. “The idea is to generate additional revenue by charging businesses on the supply side of the data for access to their subscriber base,” explains Hart. An ISP could decide to block or slow access to a site’s data, which Hart worries could shift the balance of information even more toward big institutions that can afford to pay for faster service.

“This issue only affects those end-users that consume data via the Internet,” says Tom Heffernan, vice president of marketing at online broker MoneyBlock. “Banks and other institutions access data typically using direct connections, [avoiding] the Internet, so there would be relatively little impact on their businesses,”

Smaller retail customers, however, have relied on “net neutrality” to keep the flow of data available to them via the Internet. Now, the ISPs will have the right to charge either the online brokers or their clients more to get the same information. Frequent traders and high net-worth customers are likely to get the best deals from brokers because they generate more commissions and fees than their smaller counterparts. Because institutional investors deal directly with exchanges without the Internet they won’t feel the change at all.

The most likely first effect all online traders will see is a longer list of legal disclosures and disclaimers from their brokers. Heffernan points out that retail traders already agree to a long list of instances in which online brokers aren’t deemed responsible for disruptions in data speed. More disclaimers are likely so the online brokers can protect themselves.

For investors who invest in mutual funds or buy and hold stocks, the effect will be minimal because they don’t rely on real-time time data. The funds also conduct their transactions after the market has closed.

But for big, frequent traders, who are the most sought-after clients for many online brokers, the stakes will be higher. Given their need for data and speed, they will be quicker than their smaller counterparts to sign up for premium delivery in order to have meaningful real-time data like real-time options chains, that can involve thousands of pieces of data every few seconds as the information is updated. It’s not as dense as a high definition streaming video from Game of Thrones, but slowing it down slightly will have a big impact.

There will be effects on the brokers, too.

Ending net neutrality could produce more regulations for broker/dealers, including the disclosures about any deals they might make with ISPs to speed the data along the pipes.

Heffernan envisions one scenario in which a large trading firm cuts an exclusive deal with an ISP that guarantees the broker the fastest data transmission speeds. That would give the broker lots of opportunities to take business from smaller, slower firms that can’t afford the higher speeds. An inability to transmit data on a timely basis to customers would severely restrict a brokers’ ability to compete.

We’re already seeing promotions from AT&T offering businesses the opportunity to provide their customers with “sponsored data” on mobile devices. Under these deals, a retail customer can download an app and get the data, which is paid for by the app provider. That means the customer’s monthly data allotment isn’t affected. But it also raises the possibility that the data could be blocked or slowed because a sponsor isn’t footing the bill.

Consumer groups as well as the FCC are working on an appeal to the ruling, and there is still some possibility that the FCC can just classify internet services as telecommunications services, which would keep the concept of neutrality in place. FCC Chair Tom Wheeler said, in a statement, “We will consider all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform for innovation and expression, and operate in the interest of all Americans.” Small investors included.

Published in Barron’s Online, January 31, 2014. 

Posted by twcarey on 02/06 at 01:23 PM
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