Note: The following post was written by regular contributor Neil Kjeldsen. It’s worth noting that Neil worked for nine years in the brokerage industry, most recently managing the schwab.com website and online brokerage product. He is no longer with Schwab or affiliated with any other broker.
Yesterday’s announcement by Zecco and their $0 commission trading platform generated a lot of buzz within the tech community. It’s an interesting play at an interesting time given the instability in the world, which isn’t typically market friendly, but I think it will be a long time before Zecco or any other upstart has an impact on the big brokerages. Here are several reasons why:
- Most people don’t trade that much, thus commissions only matter to a small percentage of consumers. There are some who trade very actively and generate significant commissions for brokerages, but the average account trades only a few times per year. For that reason, it’ll take the kind of bull market you see once in a lifetime (which we saw in the 90s), which starts everyone trading, to make another Ameritrade or eTrade. When that happens and if Zecco is still humming along, then maybe I’ll be wrong. Doesn’t mean they won’t survive, even build a nice little business – but pose a threat to the big guys? Not without a raging bull market. I’m certainly no market prognosticator, but with $70 oil and the US engaged in hostilities across the globe, I don’t like the odds of that in the next few years.
- Discount Brokerages expect commissions to go to 0. Schwab has dropped commissions from $30 to $10 in two years and restructured the company accordingly. They’re moving into advisory services, managed accounts, proprietary mutual funds, and banking/lending, because they know they can’t depend on trading commissions as a revenue stream forever. I don’t know the specific numbers, but I do know Schwab and Fidelity both make far more money from mutual fund and cash balances than they do from trading. Banking probably saved eTrade after the last crash and now they’re moving into the advisory business as well. Ameritrade acquired Waterhouse in part because of its advisory services. The $0 trade is the future, but I think these firms will have several more years to adjust their models to deal with it.
- Just because it’s cheap, it doesn’t mean people want it. If cheap was all that mattered, Schwab should have killed Merrill years ago. They’ve certainly impacted them, but Merrill remains a force in the financial services world. They’ve survived in large part, because when it comes to money (even if it doesn’t help performance), relationships seem to matter. Case in point: how are Schwab and Fidelity now attacking Merrill, Smith Barney, etc? By selling relationships.
Now, all that said, if Zecco could build a killer active trading platform and attract the cream of the Active Trading crop from these guys, they’d have something, but I just don’t see that happening. The cream of the Active Trader crop is not a hyper price-sensitive 22 year old with no assets. They’re older, they’re established, they have significant assets, and they typically only trade with some of those assets. I don’t see them running to Zecco to save themselves a few grand per year. The big brokerages will create relationship offers that will satisfy a healthy percentage of these guys. Zecco is as likely to find itself brawling with companies like TradeStation, which has a great product, a loyal following, and is already pretty damn cheap.
So what will Zecco attract? If they build an absolutely killer Active Trading platform, they could make me eat my words. If their community has the strength from which fee-based advisory services or mutual funds could emerge, then there could be a fine business here. But if it’s just a me-too brokerage site with ads, they’ll get the young and the price sensitive with few assets. And what happens when the young become the middle-aged? Their assets will go to the big guys with a broader array of services.
I agree. Will be interesting to see if they gain any traction with this offering.
Nice and very honest article.
Thanks
It’s always hard to predict these things. But Zecco is not just a “me too” website, it aims at much more than that.
Nice blog!
Look what Optionsxpress did in 4 years time….170.000 clients and a market cap around 1.7 billion. What’s so special about their trading system…it’s no better than E*trade’s system….but they are much cheaper. A lot of people moved during the nineties from the big banks to the online brokers like Ameritrade and E*trade because of the lower commissions….but they become as big as the banks…thousands of people working for them and a lot of legacy…..and marketing budgets over 200 million. And now people are moving to online brokers like Optionsxpress and Sogo Invest because of lower commissions. They can charge substantialy lower fees ’cause of new trading systems of the shelf… no legacy. And they are not spending 200 million marketing per year….and clearing fees are lower than ever. Zero commission will be common for both retail and Institutional equity trading in the next years. Zecco will make money from cash balances, options (cheapest in the market I heard) and other financial product….Zecco could be big…really big
I agree with Charles. There is a trend towards cheaper fees in everything having to do with banking, not just trades. I think they are on to something here! I’ve signed up and will be keeping an eye on them!
I did a decent amount of day trading in college with what was left of my college savings, and always found the existing platforms wanting. One thing that I thought could be incredibly huge would be a good programming API. I’d like to apply my own, proprietary formulas for alerts as well as auto-buy and auto-sell situations. Some platforms have those features, but they’re never more than “Buy X shares of Yahoo if the price goes below Y”. It would be interesting to be able to code your own such formulas, like “Buy X*(Standard deviation below mean stock price in the last year) shares of Yahoo when the price drops 10% over three days and is below the mean price over the last year.” The ability to put together formulas like that, and “test-drive” them over a couple of weeks (or a certain amount of time already in the past) to see how much money you would have made or lost given an investment of $X-thousand, could be incredibly powerful.
In short, mathematics has been largely shut out of Wall Street, and allowing a low-cost, open-access method could change the makeup of the market as we know it.
Plus.. it’s never a good idea to go into a price war against competitors with deeper pockets
They might surprise us!
E*trade, Ameritade, TD Waterhouse and so on did it themselves, during the nineties, against the big banks like Merrill and Citibank. What happened?
Erik
have you tried SaxoTrader ?
You can not compare SaxoTrader with Zecco. SaxoTrader is a FX broker/trader. They make money on the spread like all FX brokers.
Hi Charles
I am not comparing at all.
Eriks post is not really about Zecco but about API into trading platforms.
“Most people don’t trade that much, thus commissions only matter to a small percentage of consumers”
Yes this is exactky what they are trying to build an application for. Most people dont trade.
I will explain in terms of my experience.
I am a student with couple of grands in bank which I can afoord to invest in stocks and all. I dont want to pay scottrade or some one 7$ comminsion because when u invest very small amount like that you only make 10, 20 dollars a day if you are lucky.
Through commision if i pay 7 dollars out of 10 dollars I make what is there in it for me. It may be a penny story for many. But think in terms of younger generation who have very few dollars to spend for investing. I know many of my friends also wants to invest in.
But we need free and zecco is right fit. I guess we are ready for it..
Erik, you can create your own algorithmic trading program. Just find a broker that supports trading through an API. Tradestation has it.
Neil,
Why wait a few years to make you eat your words? How about now? I am very surprised by the result of your analysis but not shocked. You worked for the big guys right?
The only reason trade commissions are high is to prevent people from trading. Why? Because the big guys make most of their money on the float not on trade commissions. So trade commissions are just a barrier to enable the big guys to make money. By removing the trading commissions people may not trade more but finally someone is being honest with people.
So Zecco is reminding us that the big guys have been dishonest for too long. They don’t want us to trade, they want us NOT to trade. This way they can make money while our money sleeps. So they’ve decided that if we trade it will cost us big bucks. The interest of big online brokerages and their clients are not aligned!
I haven’t seen the interface but Zecco’s product can’t be the same as everyone else but with no trading commissions. Remember all the big bad trading guys have not changed their business or their fundamentals in the last six years. What happened in the last six years? Google happened! Web 2.0 happened! And as we all know these were pretty significant changes in the Web landscape.
So I hope Zecco proves you wrong. That would mean that nine years at Schwab.com blinded you just like the big guys. And if all the big guys make the same analysis then Zecco has a bright future ahead.
Without seeing more of the site’s functionality I’m with Neil on this…there is a tremendous amount of excellent technology for stock trading out there for serious stock traders…
If the site’s intent is to generate “community” in the same way as Facebook or Dogster that might happen…but get on the wrong side of a losing trade a few times and your appetite for community goes way down…
And more importantly the platform looks like a perfect oppurtunity for stock shilling…especially amoung OTC and penny stocks…the “portal” owner has clear regulatory responsibilities in this case…NASD etc will not just stand by as Zecco’s broker dealer sponsor disclaims responsibility…this is a very tricky area that Schwab and Fido and others have put a fair amount of thought into…this space is heavily regulated…as it should be since it involves the assets of individual investors…
I’m just curious how fast the typical account will go to $0 when trades are free.
Thanks everyone for their comments. And thanks for a good, honest discussion. To Alain and others who think I’m off base, you’ve all made some good points, particularly the one that if the web is equalizing all other playing fields, why not this one? I contend that trading commission isn’t the one that really matters. People will pay for ideas and they will pay for performance. Thus, I think an opportunity to bring trading or investing ideas based on performance of highly successful individual investors, small hedge funds… is a great opportunity.
All in all, I plan to follow Zecco and, in my heart of hearts, because I am in the startup world myself, I will be rooting for them. Just know I don’t expect them to turn the industry upside down. If they survive, they’ll just be another player.
Zecco sounds exactly like Skype to me - give away the basic service for free and make money on additional services. All the online brokerages already do this - except basic trades are not free.
By the way - Morten Lund - pretty bright guy.
All of you saying that no one will trust Zecco versus the big guys are delusional - spend a little time as a client of any online brokerage - none of them are any more trustworthy or above-board than any other. Sometimes the biggest names nickel-and-dime customers the most.
Can anybody tell me how zecco will manage to charge $0 brokerage. How will it earn money ?
Zecco - Is “Free” a Business Model?
The hot startups today all seem to have one thing in common today - they all have “FREE” as a business model. That is why when I read about Zecco.com, the free online stock trading site backed by the funder of Skype, my eyes rolled over. Have I heard this story before or what? Once and for all entrepreneurs, I would like to address the question that is on every Web 2.0 entrepreneur’s mind: Is “FREE” a business model?
Try fxengines.com - offers what Erik mentioned earlier. It uses time/price action algorithms to enter and exit a trade. It trades news reports like PPI, Consumer Confidence, GDP – or you can trade technicals. You can create your own system or trade live data for free – using your own system or managed engines. You can back test up to 4 years. Bad thing about the site is that its hard to navigate and a bit confusing trying to understand the technicals under certain conditions with no charts offered. But its worth a look.
I wonder what kind of sleepage there will be at Zecco. A good amount of sleepage will kill you faster than paying a commission.
The design resemblance to Purevolume.com is too close for comfort.
> Is “FREE” a business model?
Yes, indeed it can be. And a very good one too, at times. However, “free” dosn’t mean “no revenues” - it just means that to the users its free - at least the basics (as with Skype).
The worst part about this is that the Zecco bunch has been spamming personal finance bloggers pretty hard, even signing them up to an unsolicited Google Group (which is against the TOS):
http://www.wealthjunkie.com/20.....-bloggers/
FYI, Ameritrade used to offer a free stock brokerage called “Freetrade” but it ended earlier this year.
“The worst part” might have been a little too melodromatic, but.. you get the point.
That was good. Tradestation is great but there is a niche if they build a good community.
Qustion is - do they need to offer trading for that to happen.
I say not
Hey JD,
The Zecco design is nowhere near purevolume’s, check the zecco preview.
Ted: u mean like: ” one shouldn’ t even think of trying to change the SPUNGY brokerage/banking industry because they made too much money and therefore have deep pockets filled with our money that they used to acquire your neighbour as a client?” Come on man, spare me that kind of ” WISDOM” or is it ” WISDUMB”? They are used to spending 80% of their income out of transaction fees for marketing! Is that really necessary in this day and age?
-d.
Just a thought (my site has more on the subject), but what about market efficiency and information symmetry? Presumably, the transaction costs associated with trades led to more informed decision-makers participating in the stock market. With a reduction of upfront costs to 0, this may exacerbate the ‘reflexivity’ argument that George Soros so fervently believes in (the one that says that stock are not just cameras, but can actually affect the fundamental values of firms listed on the markets).
This is one of the few FREE software ideas I really like. I’ve previously posted about the fundamental problems with free software. Well, this is more like a service anyway…
My guess is that Zecco will succeed and here’s why:
1. Zecco is free.
2. Zecco has well-defined alternative revenue drivers.
* Interest rate from client accounts.
* Lending fees.
* Advertising (one of the highest CPC segments).
3. Zecco is a from-scratch-lean-light-weight company.
4. Zecco is involved with best-in-class marketers who really know how to BUZZ.
Maybe Zecco won’t do as well as I hoped. Their website seems to have gone away. I just tried going to it and it is one of those domain parking services now.
Adam, sorry you were not able to access Zecco.com. We are still in Beta mode, so we are frequently updating the site with a number of improvements. This means that Zecco.com will be temporarily off-line during these periods. Please come back soon.
At the current rate that Zecco is signing up customers I’m calulating that it will take 275 years for Zecco to gain as many accounts as Bank of America…
http://shopyield.com/blog/2006.....s/#more-39
I think that zecco has a very good idea. Many companies on the web are making most of their profits from sources of revenue other than fees. Just look at AOL. AOL is making most of its money from advertising on line. That is why AOL is going to a free service to keep it’s membership base from dropping due to competition.
Since when did you pay google to search the internet? Every time you search the internet it costs google money. Bandwidth isn’t free - paid staff that monitors servers isn’t free.
FREE does not mean the entire business plan is FREE. Google for example makes money off businesses paying for advertising.Zecco could make money on people who trade more actively, or on advertising, or on API subscriptions, or on “enhanced services”.
Ever see a restaurant give away FREE soup with a meal? FREE has been selling for ages.
Nowaday a good thing will spread like fire, fast than anyone expected.