E*Trade said 25 percent of its more than 90,000 customers experienced delays of up to a minute in the first two hours of trading on Wednesday.
The problem stemmed from its Internet access provider, PSINet, which rerouted service from one location to another without notifying E*Trade, according to Pam Kramer, vice president of product marketing.
"That created a problem for customers coming into our service from PSINet," she said. "This is one of the challenges of the Internet. We provide a service while depending on others."
E*Trade, an online discount brokerage, routed customers to its other ISP and contacted PSINet to reverse the changes, Kramer said. She added the company is currently negotiating to sign up a third Internet provider.
Like other online services that are building redundancies in internal systems, E*Trade is finding it needs to build backups for its outside system from ISPs to stock quote providers.
The service has put other backups in place including touch-tone telephone trading systems and live brokers to execute trades in a pinch.
Not only are online trading companies worried about backing up their systems to avoid investor backlash, but they also are concerned about price wars with competitors.
PC Financial Network, the nation's largest online brokerage, today announced it would lower its rate for frequent traders to $29.95 per trade up to 1,000 shares and cut its standard rate to $39.95 per trade up to 1,000 shares. A frequent trader is one that generates commissions of over $1,000 for PC Financial during a 12-month period.
That deal marks the latest in a slew of price cuts in online trading. Last month, Lombard Brokerage cut commissions by more than 50 percent to a minimum of $14.95 a trade of up to 5,000 shares.