Few businesses gained as many new customers during the dot-com peak as online brokerages. Commercials showed stay-at-home moms checking their portfolios for midday gains and gangly underachievers becoming rich by trading online.
But as the stock-market bull remains in a lengthy hibernation, the number of people who qualify as active traders has tumbled. So has the number of trades conducted at the largest online brokerages, which have stepped up diversification efforts to replace lost revenue.
Although the current environment appears grim, analysts say that online trading has kept its footing, thanks largely to established brokerages that are offering multichannel options to customers — particularly active and wealthy investors.
“A lot of the houses have gone straight for the affluent investor, and they’ve locked them in by saying they could trade any way they want,” Kathleen Sindell, a professor at Johns Hopkins University, told the E-Commerce Times. “You can trade online, you can call, you can use your PDA, and, if you’re wealthy enough, you can get in touch with your personal broker.”
While brokerages have not forgotten about average investors, their reasons for targeting wealthy customers are manifold.
According to Forrester Research analyst Betsey Stevenson, 80 percent of affluent U.S. households — those that have US$1 million to invest — are online, well above the national average. And affluent households are more likely than others to seek information about financial opportunities online.
“They’re attracted by information much more than by entertainment,” Stevenson told the E-Commerce Times. “They are a ready-made target audience.”
That is not to say the online trading landscape is rosy; it has been changed irrevocably by the recent boom-and-bust cycle, which has highlighted both the benefits and drawbacks of the online medium.
For example, E*Trade is defending itself against a number of lawsuits related to a series of outages dating back to 1999. And many investors have expressed frustration over the pace of trades made during the heaviest selling times after the markets peaked in the spring of 2000.
But in the wake of dot-com mania, investors are more realistic, according to Sindell. While a coworker’s recommendation might have been enough to prompt a stock purchase at one time, investors now are cooling their heels, making fewer trades and spending more time researching each one, she said.
The National Association of Online Investors (NAOI), formed last year, is based on that premise. The site is about to launch a new Web platform for investor education, including a lengthy online study course on the intricacies of the public market.
“Individuals who have taken the initiative to learn how to invest have more confidence in the market and in themselves,” NAOI president Leland Hevner told the E-Commerce Times. “They feel they have the knowledge and tools to steer clear of potential disasters.”
Sindell, who also wrote the book Online Investing for Dummies, said the stock market fallout likely means that fewer people will actively trade stocks.
Those who are closer to retirement will stop altogether, she noted, while younger investors will be more likely to base future stock purchases on solid information. Brokerages can address those concerns by offering several products to customers, rather than by focusing all of their attention on stock trading.
Given recent concerns about corporate ethics, investors also will want to trust their brokerage more than ever before, Sindell added. This desire will give a further advantage to well-established, real-world houses like Fidelity and Charles Schwab, which have made massive investments to beef up their Web offerings.
“Online trading will come back along with the market — but it will look a lot different than last time around,” Sindell said.
As a seven-year member of the securities industry and specifically the "online" and active trader segment, Sindell’s findings sound accurate, but do they warrant attention? Does it surprise anyone that "online" trading accounts have dried up at these big firms? That these firms are seeking the financially independent because the herd has gone and blown themselves up? It shouldn’t, we’ve known this for months and months, just ask your taxi cab driver. But wouldn’t it be a surprise to find out that a lot of these "online, web based" accounts have simply moved to firms that can support the type of trading that was going on and educating them how to trade, not just actively invest…. now this might deserve some attention.
The browser-based, online platforms of those firms mentioned have never been anything more than a portal for investors to buy and sell a few shares as investors. Not a tool for individual investors-turned-traders to trade against professionals with sophisticated trading software and millions of dollars behind each order. It’s kind of like entering a Nascar race but showing up in a Yugo… not much of a chance.
Sindell is right in saying things will be different the next time around… traders will learn to trade and investors will learn to invest, no confusion between the two. The rules of one endeavor should not be forced onto that of another, but they were and now we have a study reporting the consequences. I’d be much more interested in a study of those firms that have provided the tools and the education for traders (not investors) to see what happened to them over the last year or two… that might be newsworthy.