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By PATRICK McGEEHAN
he price war among online brokerage firms has escalated so rapidly
that the stock trade has gone from being a commodity to a come-on.
As commissions for executing stock trades sank lower and lower, Wall
Street experts said it was only a matter of time before somebody started
giving away trades. Well, that time has come: the American Express Co.
on Monday begun promoting an online brokerage service with
commission-free stock purchases for anybody who deposits $25,000.
That offer, which American Express officials say is not temporary, has
caused a lot of head-shaking in an industry that already abounds in
gimmickry. To entice investors, online brokers are tossing in everything
from trips to Hawaii to $100 bills.
"It's getting very messy," said Stephen D. McDonald, chief executive of
TD Waterhouse Group, an online brokerage firm that charges $12 for
some trades. "Next thing you know, we'll be giving away toasters."
There are no small appliances on the immediate horizon. But the firms
have started so many giveaways that even their executives have trouble
keeping track of what is being dangled before investors' eyes.
Last week, DLJdirect, the online brokerage arm of investment bank
Donaldson, Lufkin & Jenrette, was using ads on financial Web sites,
making two offers simultaneously to new account holders: investors who
knew where to look could choose to accept a credit of $100 or six months
of free Internet access, which would be paid in the form of a $120 credit.
ETrade Group went a little further this month when it started offering $150
to customers of a competitor, the Discover Brokerage Direct unit of
Morgan Stanley Dean Witter, for switching to ETrade. That was double
the offers of $75 that ETrade and Discover had made for opening
accounts.
Ameritrade, an Omaha-based firm that charges $8 for some trades, is
trumpeting an offer that may be worth more than those that ETrade and
DLJdirect have on the table. In exchange for opening a new account,
customers can get two round-trip plane tickets to London, Mexico or
Hawaii. The catch is that the tickets are free only after a customer pays
for a nondiscounted, seven-night stay at certain hotels.
"There's a lot of crazy things going on in terms of marketing and account
acquisition," said James Marks, an analyst at Credit Suisse First Boston.
Online brokerages are spending so much money on advertising and
promotion for very similar services, he said, that they find themselves "in a
position like American Express where you have to come up with almost a
gimmick that isn't sustainable."
Marks recently turned cautious on the stocks of some online brokers,
including Ameritrade and ETrade. Although he was an early proponent of
heavy marketing spending, he now fears that some online brokers are
spending far too much to acquire new accounts.
This summer's slowdown in online account activity, he said, raised doubts
about whether the online brokers could continue their growth pace. Shares
of some of them, which ran up sharply in the first half of the year, are now
about 50 percent off their highs.
"The accounts that these guys really want are the investors that will take
out margin loans," or borrow to buy stocks, Marks said. But advertising
low-margin interest rates does not attract customers the way free trades or
other promotions do, he said.
As cluttered as the landscape has become, American Express managed to
steal the spotlight, if only briefly, by creating a new business model for the
brokerage industry. While some of the biggest Wall Street firms are
struggling to shift from commission-based models to fee-based models,
American Express has decided to charge neither commissions nor fees.
"We thought that this is kind of an interesting way we can differentiate
ourselves," said Ruediger Adolf, a senior vice president at American
Express. While Adolf prefers not to describe the free stock trades as a
loss leader, American Express is giving away a service that costs it at least
several dollars to provide.
McDonald estimates that it costs the biggest and most efficient brokerage
firms at least $8 to carry out a stock trade ordered electronically. The cost
for firms that have to pay others to execute and process their trades could
run as high as $25, he said.
"We make money in other ways," Adolf said, referring to the interest that
American Express earns on the cash in customers' accounts and on loans
that customers take to buy stocks. "With traditional brokers, this would be
a very, very dangerous game because you fundamentally are cannibalizing
your main business."
In other words, American Express has nothing to lose by giving away
trades -- except money. Adolf declined to say how much American
Express expected to lose on the commission-free trades, but on the whole,
he said, "we think we absolutely can make money in this business."
The company is not making all stock trades free. Customers with at least
$100,000 in their accounts pay no commissions, but those with less than
$25,000 in their accounts pay $14.95 a trade. For the people in between,
American Express came up with an interesting twist: they can buy stocks
without paying a commission, but must pay $14.95 each time they sell
shares of a company.
That move, unusual for a brokerage, comes directly out of the mutual fund
playbook. Many fund companies let investors buy fund shares without a
sales charge, but charge one when the shares are sold.
A key component of the plan: Adolf said American Express did not want
to attract the type of investor for whom free trades would be most
appealing -- the hyperactive trader. What could sound better to somebody
who spends his days buying and selling stocks than an account that
charges no fee and no trading commissions?
Instead, American Express, like some other financial services firms
offering low-priced trades, preaches long-term investing.
"We do not subscribe to very aggressive trading strategies, particularly
day-trading," Adolf said.
To head off a rush of day traders, American Express has put in a speed
bump: Even those customers with $100,000 will have to pay $14.95 to sell
a stock the same day they bought it." |
