Competition Brings Stock Trading Costs Down to Zero

Computerworld - Two new players in the online trading arena have brought the price of buying and selling stocks down to nothing, but traditional online brokerages say they aren't worried about the competition.
The latest entry, debuting this month, is Financial Cafe. com in San Francisco, which offers free trades, free quotes and no order minimums. The company is competing against Freetrade.com, a no-frills broker that Omaha-based Ameritrade Inc. launched with no fanfare last month.
"Our philosophy is free with quality, not free and cheap," said Andrew Koslow, Financial Cafe.com's chief operating officer. He said the company aims to have one representative for every 300 customers - five times more than the industry average.
The company is able to keep stock trades free while still maintaining a high level of customer service because it has profit-sharing deals with electronic-commerce firms and charges for some of its services, according to Koslow.
By comparison, Freetrade.com has no live phone support, only e-mail help.
New York-based American Express Co. also offers free trades but requires at least a $25,000 balance for free stock buys and a $100,000 balance for free sales of stocks.
But the company isn't worried about competition from the start-ups, said spokesman Dave Kanihan. At the American Express site, customers get access to e-mail and telephone support, financial advisers, proprietary searching and online financial planning tools. Financial Cafe.com offers telephone and e-mail support but no advisers.
Although it's too early to tell, there's a sense that free trading may be a niche market. But the presence of these services might drive prices down across the board.
"I don't see this becoming an instant success overnight," said Richard Repetto, an analyst at Lehman Brothers Holding Inc. in New York. "But if these things gain traction, the commissions can go down."
The biggest challenge that lies ahead for online advertising and e-commerce partnerships is to prove themselves as reliable sources of cash, a difficult task since customers have grown accustomed to a broad variety of services from their brokers.
"You can get initial public offerings," said Russell Keene, an analyst at New York-based Keefe Bruyette & Woods Inc. "You can get insurance, you can get mortgages, (and) soon you'll be able to trade overseas.
"I think the product differentiation and service differentiation is enough not to frighten the more established players, quite frankly," Keene said.