dir.salon.com/tech/feature/2000/05/18/ameritrade/index.html
Ameritrade is the first major online brokerage to offer "no commission" t rading, but the low-ball experiment seems destined to tank. By Steve Bodow - - - - - - - - - - May 18, 2000 | G iven the Web's fondness for freeness, it's remarkable th at a major online brokerage didn't dangle free trading before the masses a long time ago.
com last month, allowing custom ers to buy and sell stocks at market prices without commission charges, you might have expected them to trumpet the move. Ameritrade has no m arketing budget for its low-profile experiment, and few expectations. If its give-it-aw ay model takes off, it will force competitors into a price war, eroding revenues and many an e-brokerage's chance of survival. At Freetrade, your zero dollar s gets you simple buy or sell market orders, period. This is strictly no -frills trading, 100 percent virtual, with no phone support, no research , no fancy quote feeds, nada -- the People's Express of stock brokers. It's not a bad deal, but it's not what investors look for. "The trend is actually in the other direction, toward richer features and better servi ce," says Dan Burke, an e-brokerage analyst at Gomez Advisors. Today's b iggest e-brokers -- Charles Schwab and E-Trade, which offer a ton of cus tomer support, research, education and the like -- are by no means the c heapest. In fact, Burke says, commission rates have remained stubbornly unchanged for the past 18 months. Investors opened a record 25 million onl ine accounts in the first quarter of the year. Like porn, decent brokera ge services seem to be something people consider important enough to pay for. They conduct more transactions, pay more in commissions and have the most to gain from freebies. But active traders tend to use limit orders , which protect them against violent price swings. Limit orders cost $5 at Freetrade -- cheap, but only slightly less than the competition. And if you're trading so much that a few bucks an order would make a big dif ference to your bottom line, you've probably got a lot of money at stake almost every day. You're going to want some insurance against network f ailures or other technical hazards -- insurance like phone support. That would suggest that the natural-born Freetrade customers might be buy -and-hold investors. Since they commit to a stock for months or years, t hey don't need to sweat the fractions of a point that market orders ofte n cost. But these sensible people who get no kick from gambling are exac tly the folks who are going to want to do their homework before plunking down their money. They'll want to see lots of data and research materia l Freetrade has none. The most likely Freetrade customers will fall into two groups. "), Freetrade screens out absolute b eginners by asking account applicants which discount broker they've been using, and for how long. I applied for a dummy account, claiming four m onths' Web experience, and sure enough, they rejected me. The site seems to recognize that it's walking a fine ethical line, offering something that could "Vegas-ize" the market even more. com is not meant to increase customer trading activity ... Obviously, if we do not charge a commission, we are not motivated to increase a customer's trading activity." Freetrade's revenue will come from several sources: ads , margin interest and from selling your order flow to third-party broker s, a common industry practice. There's nothing inher ently wrong with making money in any of those ways, which taken together constitute Freetrade's entire business model. What's interesting is tha t the company feels the need to implicitly disavow them, as though free trades were, potentially, the online-investing equivalent of crack. Some traders alread y maintain more than one online brokerage account, keeping enough money with a high-end firm like Schwab or DLJ Direct to reap its benefits and then doing their day-to-day trading at cheaper sites like Ameritrade. Fr eetrade could appeal here -- but is it that big a market? Consider instead what parent company Ameritrade admits is an entirely pos sible outcome: Freetrade's low-ball experiment tanks. If no one is willi ng to give up better service to save on commissions, it would expose the fact that the thing most online brokerages charge for is not the thing for which customers are paying. In a field as competitive as e-brokerage , that revelation would surely shake up some business models. Freetrade' s failure is as likely to change the industry as its success. com - - - - - - - - - - - - About the writer Steve Bodow is a writer in New York who has contributed to New York magaz ine, Wired and Feed.
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