Sep. 8 (Chicago Tribune/KRTBN)--Stability may seem an odd concept to
associate with the rocketing world of online investing, but in fact,
the menu of commissions charged to trade online had been relatively
stable since a price war tapered off nearly two years ago.
Now, however, a number of online brokerages are launching price cuts
and price-related promotions that are testing the calm and resurrecting
the question: Just how low can commissions go?
Zero is not an outlandish answer, according to some crystal-ball
gazers.
At this point, no one is predicting a resumption of all-out war, but
many analysts foresee scattered skirmishes.
"I think what's happening is that we're seeing price cuts but
selective price cuts targeted at specific customer segments, in most
cases the most-active online traders," said Bill Burnham, an industry
analyst who recently joined Softbank Capital Partners, a Boston-based
venture capital firm, as a general partner.
"I think we will see limited tit-for-tat price cuts, but I don't
envision a full-scale price war," he said.
The loudest salvo, by far, was launched by E-Trade Group Inc. last
month, when it rolled out a commission-rebate program for its
most-active stock traders, the most-profitable client segment for any
online brokerage.
The Menlo Park, Calif.-based firm, one of the nation's largest online
brokerages, introduced a three-tiered pricing structure that drops
commissions as low as $4.95 for frequent traders.
Investors who make at least 74 trades a quarter can get this price on
subsequent trades if those trades are market orders -- to buy or sell
at the best available price -- stocks listed on the New York or
American Stock Exchanges. The commission is $10 lower than previously
charged for such orders.
Commissions also fell on Nasdaq-stock trades and on limit orders,
which are orders to buy or sell at a specific price. The lowest
commission on such offers is now $9.95.
"It's common for active investors to have more than one online
account, so we are trying to encourage our consumers to consolidate
their activities and assets with E-Trade," said Michael Sievert, a
company spokesman, who noted the company enhanced services to its
most-active traders as well.
So far, no major brokerage has followed E-Trade's lead in price
segmentation, but analysts say that is likely to change.
"I think it's an inevitability," said Greg Smith, an analyst with
Hambrecht & Quist in San Francisco. "Some brokerages already offer
discounts if you make a certain number of trades, but they don't
advertise it. They may get more high-profile about it."
Meanwhile, other brokerages have taken different commission-related
steps recently in efforts to woo investors.
Firstrade Securities Inc., a much smaller online brokerage based in
Flushing, N.Y., last month reduced commissions from $9.95 to $6.95 on
most market orders.
Web Street Securities Inc., a modest-size online brokerage based in
Deerfield, ran a six-week promotion this summer that offered anyone
opening an account by Aug. 31 the ability to make one free trade of a
Nasdaq stock each day through the end of the year.
And Charles Schwab & Co., the leading online brokerage in the U.S.,
launched a promotion this summer to rev up its business in the
fledgling British market -- offering commission-free trades for limited
periods.
These are disparate initiatives, to be sure, but these and others
reflect efforts to stand out in the increasingly crowded and
competitive landscape, which now has 140 online U.S. brokerages, up
from just 27 two years ago, according to Gomez Advisors Inc., based in
Lincoln, Mass.
"The room ... has gotten very loud," said Russell Keene, an analyst
with Putnam, Lovell, deGuardiola & Thornton Inc. in New York. "And when
a message is hard to get across, you have to use something to grab
investors' attention.
"For example, the $4.95 at E-Trade, even though it will not apply to
96 percent of investors -- they will look twice," he said. "And the
free-trade offers will turn heads."
The commission-related developments this summer come against a
backdrop of recent weakness in online trading volumes, which has
contributed to softening in stock prices of online brokerages.
But analysts see little linkage in the two developments.
"Most executives running these firms look past day-to-day trading
volume fluctuations," said Burnham, of Softbank. "A bigger factor (in
recent commission developments) has been a desire to acquire and retain
the most valuable customers."
Whether cutting prices is the best way to do this is the subject of
debate in the industry.
"Price can often be a good means to acquire customers but not to
maintain loyalty," said Andrew March, director for financial services
at J.D. Power and Associates, a market research firm based in Agoura
Hills, Calif.
More important factors in retaining customers are "customer service,
education, integrity and reputation," said March, citing a recent
customer-satisfaction survey that the firm conducted.
"You can't compete on price anymore and win," contended Frank Lallos,
a senior analyst at Gomez. "Investors want other services: access to
initial public offerings, after-hours trading, financial planning,
tools, calculators and fixed-income securities."
The average commission paid by U.S. investors, when weighted to
reflect volume, has ranged between $19 and $21 for the last year or so,
he said, noting this reflects investor preference for midprice,
service-oriented online brokerages such as Schwab and Fidelity
Investments.
"People who want to pay $7 and $5 don't command that much market share,
" he said.
Schwab, in fact, is hoping it can woo and retain the much-coveted
active trader, even at its $29.95 commission level, by providing
enhanced services through a program called Velocity, which it rolled
out last month.
"Everyone is wrestling with the same thing," said Tracey Gordon, a
spokeswoman for San Francisco-based Schwab: "How to deliver on high
expected value and at the same time run a business that has to be
profitable."
Given that many new online brokerages are trying to carve out market
share, investors can expect to see "a lot of creative applications of
commission pricing," said Tom Lewis, co-chief executive at Ameritrade
Holding Corp., a major player based in Omaha.
J. Joseph Ricketts, chairman and co-chief executive at Ameritrade, is
among those who think the day may come when commissions are reduced to
from selling ads on their sites to providing financial counseling to
clients.
In fact, Web Street Securities offers commission-free trades on orders
of 1,000 shares or more on Nasdaq stocks priced at more than $2, and
has done so for two years, said Joseph Fox, co-chairman and CEO.
"We get rebates back from market makers ... so we say forget
commissions," Fox said. (Online brokerages get such rebates for
directing orders to market makers, who execute the trades.)
So far, it appears no other online brokerages have followed Web
Street's lead, and observers say that may be the case for quite some
time.
"The problem with offering free trades is that people are likely to
take you up on the offer, and when they do so, you are likely to lose
money," Burnham said.
He said he thinks it's unlikely that commissions will drop below $5,
because there are variable costs associated with every transaction.
"You will see gimmicks and promotions, he said, "but it is difficult
to build a good business model below that level."
Still, other observers say anything is possible -- including
commission-free trading -- in the Darwinian-style struggle for
dominance in this nascent industry.
"The industry needs to be prepared for it ... for whatever might
happen," said Ameritrade's Lewis.
By Kathy Bergen
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