Information-Processing Costs in Online Stock Trading

The recent proliferation of online stock trading raises the question of whether online stock trading provides online investors with better benefits than does traditional brokerage-based trading. Compared to its well-known benefits such as lowered commission costs and convenience , the costs incurred to online investors before the transaction – information-processing costs – seem to have received little attention. Due to the ‘do-it-yourself’ nature of online stock trading, individual online traders have to expend their time and effort to reach investment decisions. More specifically, online investors need to sort out the relevant online information, reprocess it to suit their investment needs, and use the refined information to calibrate their final investment decisions. Depending on an individual investor’s characteristics, the costs to reach their online transactions can vary. For some online investors, the costs can be higher than the savings in online transaction costs, thus making the overall cost of online trading no better than that of traditional trading. From this perspective, this paper describes how information-processing costs in online trading can be trade-offs for the benefits of lowered commission costs by focusing on na ṏ ve online investors who have little investment experience and market knowledge and are thus likely to have higher information-