Online Trading Brokers Shine During Slowdown

For a smaller Internet brokerages, the economic slowdown, and collapse of the financial markets has set off a tremendous influx of growth. The S&P 500 (^GSPC) fell 38 percent in 2008 as the housing crisis turned into a broader credit crunch, bringing financial markets to a standstill and diminishing wealth across the board.

Since the start of the financial and credit crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade (AMTD) and Charles Schwab (SCHW), company records show. By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup’s (C) Smith Barney and Bank of America -Merrill Lynch (BAC) according to Reuters.

The Online Brokerage Landscape

TD Ameritrade, the biggest by trades-per-day, saw a 46 percent year-on-year jump in new accounts in the last quarter of 2008 and brought in $7.8 billion in new assets.

There are 16 established Internet brokerages operating in the United States, ranging from Zecco, which advertises free trading, to Charles Schwab and Fidelity, which offer a suite of options from bare bones to bespoke, including advice from in-house brokers, and managed accounts.

Within that range, investors can choose to go it alone, access social networks where investors compare their portfolio strategies, seek paid advice, or any combination.

Barriers to entry are low: trading accounts can be opened with as little as $500, and trades executed for $5 to $7 each. And there is no commission.

Investors Real Money stays with Established Brokerages

Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.

However, according to eRollover’s research, many investors like to have a “do it yourself” account online, yet still rely on some sort of advice for their serious retirement money.

Will this trend continue as investors continue to grow more confident in their abilities to manage their portfolios? Typically in extreme market conditions, there is a flip flop where investors doing it themselves move back to traditional advice and vice versa. Only time will tell as the recent stock market rebound may make investors forget the recent pain.

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