Ever since Charles Schwab lowered their commission rates for online trading & other brokerage firms joined the bandwagon of cutting the brokerage fees, I have been wondering about this topic. Are we slowly moving towards converting the whole discount brokerage industry into a commodity market?

What is commodity Market?

The economic definition of commodity market is a truly capitalist market where there is perfect competition because of presence of hundreds of direct / indirect competitors. The profit margins of such industries is tending to zero. Everyone is a bulk producer. Typical examples of commodity market is the agricultural industry. There is no product differentiation or brand loyalty. The company who manufactures the component with the cheapest rates is the most profitable in the industry. A few other industries which are tending towards becoming commodity markets are Airline Industry and Automobile Industry. Such industries are often associated with massive price wars. The examples of which we see on TV everyday with several thousand dollars in cash backs on the latest car models. You got to stop and wonder what in the world is going on with the marketing heads in such companies. Well the answer is simple; due to the competition, if you do not lower your cost and not offer crazy deals to buyers, you are set to lose your market share.

What is the future for Brokerage Industry

Brokerage industry traditionally was very far from such a structure. Investors worked with a real person who made sure your wealth is in safe hands. But then started coming the power of technology. People were replaced by online platforms which could be used by investors for trading. Companies started developing new trading tools and faster platforms to establish brand presence. The last 5 years was such a period. If you look at the recent history over past few years, fastest growing brokerage firms have been started very very recently. Now these firms are posing a major threat to established organizations a lethal threat. This threat is no different than what Toyota and Honda did to US automakers in early 90s. They slow started and quickly ramped up to defeat them for the top position in terms of sales and consumer confidence.

Why is Brokerage Industry Heading towards Commodity Market

As technology grew further and wider almost all brokerage firms were offering the same high quality tools to everyone. So who is the winner? Now it seems pretty apparent that consumers started switching brokerage firms and went more for cheaper prices than brand loyalty because brand did not matter when all the product offering are all same. In my personal opinion, some of these new brokerage firms such as TradeKing, Zecco are breaking the rules and creating innovative platforms and leaving behind earlier market leaders such as Charles Schwab & Scottrade. The established players started seeing a drop in trading activities as people switched to new entrants. The initial offers were short teasers like open a bank account and get $100 free stock trades or 10 stock trades free every month. However in the latest price wars companies are slashing their prices left right and center.

Which brokerage firms are leading the movement

E-trade was the latest to join the price war by slashing the rates its charges its non frequent customers to $ 9.99 from $ 12.99. The wars began with Charles Schwab reducing its rates to $ 8.99 from $ 12.99 . Fidelity followed soon after by dropping rates to $ 7.95 from $ 8 to $19.99 pricing. This means that companies have reduced their revenues by as much as 30% in last one month. This is also reflective in their share prices. E-trade has dropped 17% and Charles Schwab has dropped 8% in last one month.

What does it mean for investors

This is hence the right time for consumers to look at the brokers which provide cheapest rates and open accounts with them. As we mentioning earlier, since the brokerage industry has become a commodity it does not matter if you open a particular brand. Go for the lowest rates. Tradeking, Zecco or Options House would be our recommendations.

1. OptionsHouse is currently running special ads for 100 Free Trades if you open your account before April 30th. On top of that, they are the cheapest as far as the commission rates go.

Get 100 Free Trades with OptionsHouse.com

2. TradeKing is the top Rated Broker by SmartMoney – 4 years running (2006-2009). It also got 4-Star Rated Broker by Barron’s – 12th Annual Survey of Best Browser-Based Online Brokers. All that is available for low flat fees – $4.95 per trade plus $.65 per options contract

Open an account with Trading King – Tradeking

3. Zecco:Best thing about Zecco is their 10 free trades every month if you make 25 trades in a month. Hence your effective rate actually becomes a lot lower than what they advertise which is 4.5$/trade. Their effective rate comes down to 2.70$ / trade, now who can beat that? See details below:

Trade with Zecco for Free

Over the last 15 years Americans have become used to large amounts of unsecured credit through home equity lines of credit, installment loans and credit cards etc. Believe it or not; to some degree this does make America the superpower the way it is. Americans are known for spending, spending more than they can afford. It’s a no brainer that spending stimulates the economy. However with banks facing unprecedented losses in unsecured lines of credit and at the same time government tightening regulation on how much fees can be charged on these loans, industry experts are speculating that these lavish times may not last for very long. Now let’s think about what it means to consumers. From a borrowers point of view lending would be limited to two basic products:

1. Lending against collateral: This used to be the common norm for very long time. We would move back to an age when the collateral amount used to be always greater than the amount you remain to pay. For example if you need to a credit card for 5000$, you either put a deposit down or show property that evaluates higher than the credit line. That will be the only way consumers will be able to enjoy the benefits of the card.
2. Lending for short periods of time with abilities to re-price: The recent regulations have made it difficult for banks to change the terms of consumers who have shown bad behavior on open ended loans. For good people to get loans at good terms banks have to re-price for risk. Hence we might see a slew of new unsecured lines of credit which are close ended and the banks have the ability to re-price the consumer if he shows a negative behavior.

What does it all mean to an investor? Well, you might want to hold your breath and watch before you invest in any credit card companies. If you are an active trader and are open to taking some risks, this might be a good time to invest in credit card companies. Because believe it or not, these companies are going to come up with a plan B to keep the business they have enjoyed so far.

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