We outlined three points in 2006 on why Zecco’s free trading model raised some red flags. Unsurprisingly, the discount online brokerage firm has been forced to change its pricing structure due to the economic crisis.

Over the years, the zero commission brokerage service increased the minimum asset balance to $2,500 and decreased free trades from 40 to 10. Now the company is putting further restrictions on trades. In a letter to customers, CEO Jeroen Veth says that as of March 1 customers will be required to have $25,000 in assets to qualify for free trades. The full letter is below.

Why? Zecco is no longer making money thanks to the now low interest rates on customers accounts. And revenue from discounted commissions are amounting to very little.

We saw the writing on the wall for the trouble this company could face in an unstable market. Although Zecco was able to secure $25 million in funding late last year, the company has been hit hard by a decline in trading due to the economic downturn. In an effort to boost trading, Zecco is allowing customers who make at least 25 total trades per month to also qualify for 10 free trades. In early January, Goldman Sachs forecasted a 28 percent decline in daily average revenue for discount brokers.

Even the premier brokerages like Charles Schwab are not immune to the current economic crisis so its of no surprise that Zecco, whose pricing structure raised some red flags in 2006, is being forced readjust its pricing model. Last week, Charles Schwab warned that revenues could drop as much as 20 percent this year and said it will cut between 500 and 600 jobs, or 5 percent of its staff in the current quarter due to low interest rates and a decrease in trading.

Here’s the entire version of the letter Veth sent out:

Dear Zecco Trading client,

I’m writing to tell you that as of March 1st, 2009, we’re increasing
the minimum level of assets needed to earn 10 free trades per month to
$25,000. We’re also adding a new way to get free trades: customers who
make at least 25 total trades per month will also qualify for 10 free
stock trades per month.

Additionally, as of March 1st, 2009, you’ll be able to earn $75 for
each friend referred to Zecco Trading through our Zecco Friends
program. You can use that cash to offset trade commissions or make new
investments.

Why was this necessary now? Anyone who’s read a newspaper lately knows
that the US and world economies have been hit hard over the past 4
months. As a result, some of the largest corporations in the world
have had to cut costs and adjust to new business realities. With
reduced retail trading volumes and lower interest rates, we at Zecco
Trading simply could no longer provide free trades to as many people
as we would like.

Many customers will not be affected by this change. For those of you
who are impacted, I want you to know that I understand this is
disappointing news. Since our founding, our goal has always been to
provide a great value to online investors, and we’ve always made free
stock trading part of that. And while we continue to provide some of
the lowest trade commissions of all leading online brokerages at $4.50
each, we understand that nobody likes to pay for something that was
previously free.

I’d like to emphasize that we are continuing to invest in our customer
service and trading platform. You may have already noticed the
improvements within our customer service team. We’ll also be upgrading
to an entirely new trading platform later in 2009. This new platform
will improve reliability as well as introduce advanced order types,
enhanced options trading capabilities, online bond trading, better
account management, single-step login, and a faster website.

So how can you qualify for free stock trades? There are two simple
ways to do it:
1. Keep $25,000 in net assets in your account. This doesn’t have to be
cash — it can be stocks, ETFs, mutual funds, options, or other
assets.

OR

2. Make 25 total trades in a calendar month. These can be stock, ETF,
or options trades. And yes, free trades count.*

For more qualification details, visit:
http://www.zecco.com/trading/newpricing.aspx

As mentioned above, as of March 1st, 2009 you’ll also be able to earn
$75 for each friend referred to Zecco Trading. You must refer your
friend through our Zecco Friends Program, and your friend must open
and fund their Zecco Trading account with at least $500. See program
details here.

Thank you for your loyalty to Zecco Trading. We intend to continue
earning your business as the best value for online investors.

Jeroen Veth

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There have been a lot of startups focused on enhancing your online personal finance, mostly around analyzing your investments (Cake, Zecco, Covestor) or expenditures (Mint, Wesabe). By contrast, Billeo functions as a straight forward tool for automating or remembering to pay your bills online.

You tell Billeo what bills you want to pay automatically or be reminded to pay and their service sends reminders and tracks you payment history online. Although a lot of banks offer online bill payment to third parties, Billeo also tracks your payment stats and compares them to the crowd. If you download the toolbar we previously covered, Billeo will also automatically fill out a lot of financial forms for you online. However, while other financial management tools haven’t incorporated online bill payment, it seems a clear feature addition that will compete with Billeo in the future.

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Despite our criticism, the company soldiered on. They’ve built out their trading platform to to get the heavy day traders to use them, and launched a social site called Zeccoshare that allow like-minded investors to share opinions on stocks (which in turn drives transactions). They say they’ll soon begin to harness the collective intelligence of those users to get even more data about stock to traders. There are others experimenting in this space as well.

Today the company is announcing a $25 million round of financing, adding to the $10 million they previously raised. They’re also filling out their executive team quite nicely. Who knows, maybe, just this once, we were wrong when we called them a loser.

We’ll just put Etrade into the deadpool instead.

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Now we have a second recent experiment in this area, the launch of Motley Fool CAPS. The service joins a host of others (such as SocialPicks) seeking to forecast markets. CAPS lets users place predictions on a publicly listed stock’s performance vs. the S&P 500 over a given time frame. After 7 such predictions a new user is given a CAPS percentile ranking that takes into account their overall return and accuracy (correct predictions / total predictions).

Users join the service for the bragging rights that come with being number one on the leader board and the various award icons adorning their profile. But CAPS is also using that data to create buy/sell recommendations on stocks. Users with a higher rating affect a stock’s recommendation far more that users with low ratings. So its like Wisdom of the Crowds, but with a weighted average towards proven winners.

Markets have traditionally been seen as the most efficient way to value information (even for the ill-fated DARPA terror futures market). But for investors looking for an edge, CAPS may give them the information they need.

A problem, though, is that unllke PicksPal, “experts” on CAPS, which are those users with very high ratings, know that they are affecting stock recommendations. The simple fact that they have this knowledge may affect how they pick stocks, and disrupt the entire system (one of the basic ideas behind the original crowds v. experts analysis in Wisdom of the Crowds). If and when that happens, CAPS may be little more than a way to push stocks that “experts” have a financial interest in, or for other non-efficient reasons.

There are rumors that the new free stock brokerage Zecco is going to offer a similar service. If Zecco customers don’t know that they are part of the user group being used to make predictions, their results may be much better over the long run.

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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:

1. 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.
2. 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.
3. 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.