Novice Investing - Discount Brokers Going Broke

Date: Monday 01st 2008f December 2008 03:57:17 PM

Discount Brokers Going Broke - 10/12/2006

By: Novice Investing Staff

After we have featured Zecco which offered $ 0 commission for online stock trading, Bank of America which has a nation-wide reach, has decided to offer 30 free trades per month for account holders north of $ 25,000. Meanwhile, Zecco was offering this free trade for accounts with balance of $ 2,500 or more.

Contrary to Zecco's announcement, shares of leading discount brokers feel sharply on the news. Charles Schwab Corp. (SCHW) fell 5 %, E*Trade Financial Corp. (ET) fell 10%, TD Ameritrade Holding (AMTD) fell 10.5% for the day.

What is happening? This announcement shows that a) commission price is becoming irrelevant, b) discount brokers cannot rely on just price. But as the name suggests, discount brokers is different from conventional brokers because it gives less service/ stock recommendations than competitions. As a result, they can cut cost and pass the savings in terms of lower commission. Now, if Bank of America, which already offers you savings, checkings, credit card, mortgage payments and personal loans, can offer you 30 free tradings in a month, then who would need discount brokers? Heck, Bank of America can be found nationwide, unlike discount brokers who mainly domicile in the internet to cut cost.

Of course discount brokerages still boast a lot of other benefits, other than price. For example, they can offer lower margin rate or faster trading platform for a more advanced traders. In the end, giving unique propositions for your customers will work best in the long run. However, we believe that this free offering by Bank of America is the foreplay of the difficult road ahead for discount brokers in general. Right now, Bank of America offers the free trade for higher balanced accounts. What prevents them from making similar move to accounts having a balance of $ 1000? Even Zecco will probably need to think of another way to survive.

All right. Probably the immediate demise of discount brokers are far overblown. However, don't expect things to be so rosy either for these discount brokers. Some of them do not make their profits from basic commissions. However, it still indicates that competition is heating up. How much more trading volume do they need in order to boost their bottom line? That even won't help much if most of the trades done are free.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Charles Schwab Corp. (SCHW) or any other securities.

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