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Online Trading Market Sees Stagnant Growth

  |  March 26, 2002   |  Comments

The online trading industry has seen little new growth in the past six months, according to a study by J.D. Power and Associates, with only a 2 percent increase in new investors.

The online trading industry has seen little new growth in the past six months, according to a study by J.D. Power and Associates, with only a 2 percent increase in new investors.

There is some good news for the online brokerage industry in the "2002 Semiannual Online Trading Customer Satisfaction Study." Although 70 percent of online investors changed their investing style after Sept. 11, 90 percent plan to continue trading online, and one-third plan to increase their trading volume.

Many of the new online investors are coming from what appears to be an unlikely demographic. While online investing among the Generation X segment (ages 25 to 34) declines, seniors (55 and older) are increasingly drawn to it. The senior online population has more than doubled in the past year, and seniors now represent one-fourth of all online traders.

The study found that online investors are now primarily buying stocks on the dip, acting more cautiously or conservatively and placing greater emphasis on diversifying their portfolios. This new caution may have contributed to a doubling in the use of multiple brokerage firms and a tripling of the percent of portfolios placed with secondary firms, exceeding the levels observed a year ago.

Aggregation services, which provide investors with the convenience of compiling all online account information from multiple sources on a single Web site, has declined both in importance and likelihood of use.

"Consolidation, which was the name of the game six months ago, is not working effectively to retain current investors," said Ellen Guion, senior research manager of investment services at J.D. Power and Associates. "Investors are closing multiple accounts within their primary firm, but the majority are moving those assets to new or existing accounts with a different firm."

The study rated Scottrade highest in overall customer satisfaction, largely due to high ratings from investors for customer service and trade execution. Scottrade was followed closely by Merrill Lynch, Fidelity and Schwab.

"Firms that have focused on information resources and customer service will continue to be on the right path, as these factors are still the key components of investor retention," Guion said.

Information resources offered by online financial service providers continues to be the key driver of overall satisfaction, followed by customer service, trade execution, Web site capability, core values and cost.

The study is based on responses from a random national sample of 10,344 online investors who primarily invest with one of 15 firms included in the study, which comprise 75 percent of the market.

Even before Sept. 11, a survey of leading full-service and discount online brokerage firms by Deloitte & Touche LLP's Financial Services Industry practice done in the summer of 2001 found that average activity in online accounts had declined 42 percent (see Online Trading is a Whole New Ballgame). Online investors blamed market volatility, which began in the spring of 2000.

The Deloitte & Touche survey found that online brokerages were responding by changing their business models to provide investors with financial information and advice, quality customer service, an array of products and innovative technology to gain competitive advantage, thus making the differences between them less distinct and quantifiable.

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