Has a New Price War Broken Out in Online Trading?

Analysts argue that firms like Schwab are lowering commissions to remain competitive while building up assets.

WHEN CHARLES SCHWAB RECENTLY reduced its fees for online trading in stocks and non-Schwab exchange-traded funds to $8.95 per trade from $12.95 per trade, many wondered if this move signaled the start of another round of online-broker price wars.

Prior to the change, which was implemented on Jan. 19, Schwab had had a tiered pricing structure. Retail clients who were considered active traders, or who held more than $1 million in household assets, paid the $8.95 rate for several years.

According to William Blair & Co., a market maker in Schwab stock, the pricing change is targeted at a specific customer segment—retail clients with less than $1 million in household assets, bringing this segment in line with the company’s existing pricing scheme for more affluent clients and active traders.

Blair’s analysts, Mark Lane and Katherine McCauley, say that, “We view these actions as a refinement and not the start of more intense price competition. While we believe there will continue to be modest pressure on pricing over time and our models reflect this pressure, we view online equity trading commissions as largely at a point of indifference.”

However, Jason Raznick, who serves as a director at Benzinga.com and Investimonials.com, two Websites that offer stock trading ideas and financial product reviews, believes that price competition is becoming increasingly fierce between various firms. “The revenue model at these companies appears to be shifting from commissions to selling order flow to larger brokerage houses and amassing more assets,” he says.

Looking ahead, Raznick says that this trend is unlikely to abate in 2010 as firms find it necessary to lower prices in order to remain competitive. “Under such circumstances, the need to gather more and more assets and steal market share becomes more important than ever,” Raznick asserts. “Brokers that are losing this battle will likely need to pursue consolidation by selling themselves to another firm or attempting to acquire competitors in order to increase their asset base.”

Raznick notes that “bare bones” brokers such as SogoTrade (http://www.sogotrade.com) charge as little as $3 per transaction. Dave Whitmore, president of SogoTrade, sees the commission price cuts as beneficial to the industry as a whole.

Whitmore says that brokers like Schwab (SCHW), Fidelity, and E*Trade (EFTC) have had high commission structures, and points to TD Ameritrade’s price cut to $9.99 per trade a few years back as a turning point for the larger firms. He points out that SogoTrade’s fee of $3 per trade, while offering many of the same services and functionality of other brokers, should prompt consumers to step back and ask themselves what they are really paying for.

Wade Cooperman, CEO of tradeMonster (http://www.trademonster.com) says, “If it’s good for the investor—and low easy-to-understand commissions are—we welcome it.”

Stephen Ehrlich, CEO of Lightspeed Financial (http://www.lightspeed.com/) believes that today’s active and semi-active traders are sophisticated enough to know that there’s more to choosing a broker than simply which is offering the lowest commissions. “If your trading platform is subpar or educational resources have been pared back or eliminated then cheap trades suddenly don’t mean as much,” Ehrlich says.

Steve Sanders, a vice president at Interactive Brokers (http://www.interactivebrokers.com), believes that Schwab’s new fees still make no sense for active traders or institutions. IB moved to a transparent unbundled-pricing structure a number of years ago whereby the firm explicitly charges (or rebates) exchange and clearing fees, and charges an IB fee based on monthly volume. “The more you trade the less you pay under IB’s structure,” Sanders says.

He notes that IB’s pricing for 100 shares is $1 or lower, and that the average trade size these days is 200-400 shares, even for institutions, as nobody likes to expose their trading intentions. Sanders says, “200 shares still costs $8.95 at Schwab, which is OK for the occasional investor, but not for the active trader.”

Different brokers have different ideas about why investors and traders switch platforms. SogoTrade’s Whitmore says, “Value is becoming very important to active traders. In a recent survey, SogoTrade found that price was the most important reason among traders to switch to another brokerage.”

Lightspeed’s Ehrlich notes, “In the second half of 2009 alone, more than 30% of new accounts opened at Lightspeed where traders who had come from one of the traditional online brokers, this was up from the single digits for the entire year in 2008. Lightspeed attributes this uptick to its continued commitment to its trading technology, education, and client service.” Over at tradeMonster, Cooperman states, “In addition to low commissions, though, a proactive investor needs a potent mix of intuitive trading tools, embedded education and a customizable platform to succeed long term.”

The $8.95 rate puts Charles Schwab right in the middle of the pricing among the 30 or so brokers we follow regularly in The Electronic Investor. It’s not an earth-shaking price change, but it’s interesting to see one of the big players hit that level. E*Trade and Fidelity continue to have tiered pricing. To me, the big signal is that different prices for different types of customers might come to an end.

It appears to me that Schwab’s peers and competitors have interpreted their pricing change as a positive move overall, putting their fees more in line with the rest of the world rather than marking a new low. Will it spur Schwab’s customers to place more trades? Or entice customers of Schwab’s competitors to switch over? We’ll check back and find out.

Posted by on 01/31 at 04:58 AM

Name:

Email:

Location:

URL:

Smileys

Remember my personal information

Notify me of follow-up comments?

Submit the word you see below:


<< Back to main