Online brokerages, such as Ameritrade and E-Trade, were born in the '90s as innovative upstarts, offering low-cost alternatives to traditional brokerage houses. They took great delight in--and made headlines across the financial press for--charging a fraction of what old-school brokerages had been siphoning from us in sales commissions. Now, just a few years later, the prices are heading even lower.
Last fall, upstart Zecco.com launched the first attack in what's likely to be an online brokerage price war, offering free basic stock trades for anyone with at least $2,500 in their accounts. Within days, Bank of America responded with an offer of free brokerage trades for customers who keep at least $25,000 in a checking, savings or money market account, or in a CD. The plan was initially offered in the Northeast but has since expanded. The TD Ameritrades, E-Trades and Charles Schwabs of the world suddenly find themselves having to justify to customers why they should pay $5 or $10 per trade for services others are providing free.
Free stock trading has been tried in the past--generally with poor results--but Zecco might be onto something. Free, after all, is the lingua franca of the internet world. It would not be surprising to see a situation develop where there are two types of brokerages: high-end, traditional shops where you pay for advice, hand-holding and personal attention, and those where you pay nothing for no-frills service.
Zecco's site features blog entries, a forum section and polls along with the basic brokerage services. It's too soon to know how the site will fare, but its approach seems smart. Other online brokerages may be compelled to follow Zecco's lead sooner rather than later.
Meanwhile, Bank of America hopes to use free trading to convince customers to sign up for mortgages, checking accounts and other bank services. Don't be surprised if Citi, Wells Fargo and other bank-affiliated brokerages follow its lead. And while the cost savings might not be enough to persuade you to switch to Bank of America, if you're already a customer, take the free trades and run.
In any case, commission-free trading is a friend of the investing public. Look for more opportunities in coming months.
Scott Bernard Nelson is a newspaper editor and freelance writer in Portland, Oregon.