Competition Intensifies Among Online Brokers

The online trading population has declined by approximately 20 percent during the current wave of stock market volatility, but the remaining online investors indicate they will stay in the market and continue to use online brokerages, according to a study by J.D. Power and Associates.

The “2001 Semiannual Online Trading Investor Satisfaction Study” found that traders with more than 60 trades per six months intend to maintain their trading volume. Thirty percent of online traders surveyed intend to increase their trading volume in the next six months; 58 percent expect no change in their activity.

“With only 12 percent of the traders surveyed expecting to decrease their online volume, brokerage firms looking for an end to the decline in online trading volumes may find some comfort in these statistics,” said Nancy Salk, director of investment services at J.D. Power and Associates.

Competition among online trading services appears to be intensifying. In August 2000, the top 14 firms captured more than 92 percent of the market; the same firms now capture little more than 80 percent. In the last six months, an average of 50,000 American households have started to trade online each month, down from an average of 166,000 households per month over the previous period, which corresponds to the recent stock market decline.

Online investors reported fewer problems overall with their online brokers, J.D. Power found, from 11 percent in March 2000 to only 6 percent in March 2001.

“The reduction in overall problems reported by customers is primarily the result of brokerage firms resolving many of their technical issues,” Salk said. “With the large reduction in technical problems, customer-service-related issues are the most commonly reported problems in 2001. It’s all about customer service, and that’s where the online brokerages should be focusing their efforts.”

J.D. Power’s study ranked Fidelity Brokerage Services highest in customer satisfaction. Fidelity was followed closely by Schwab, Datek Online, Scottrade and Morgan Stanley Dean Witter.

“Despite the advertisements focusing on low-trade costs, customer service continues to have the most significant impact on an online trader’s overall satisfaction,” Salk said. “It is no surprise the two firms at the top of the ranking are noted for their commitment to customer service and support.

J.D. Power also examined consumers’ views on the growing interest among online brokers to offer a “direct access” option, where investors have the ability to determine the market maker (such as Knight-Ridder) or the ECN (Electronic Communications Network, such as Island or Instinet) that routes their orders. Approximately 80 percent of the highest-volume traders believe it is of little importance that their brokerage offer this service. However, 22 percent of these traders intend to use direct access in the future. The primary reasons for interest in direct access are the ability to get a better price for the trade and greater execution control. Thirteen percent of these highest-volume traders would be willing to pay 9 percent more for direct-access service.

J.D. Power’s study is based on responses from a random national sample of nearly 8,000 online investors.