Online Brokerage Price War: Ameritrade, E*Trade, Fidelity and Schwab Involved
E*Trade is the latecomer in the heated comptition of slashing trading prices. In a press release this Tuesday, it changed its original 3-tier price system to 5-tier, and cut the price across the board.
The new E*Trade pricing:
- Heavy Traders with 500+ trades/month: $6.99 per trade
- Heavy Traders with 50-499 trades/month: $7.99 per trade
- Heavy Traders with 5-49 trades/month: $8.99 per trade
- "Serious Investors" ($50,000 or more balance): $11.99 per trade
- "Main Street Investors" (less than $50,000 balance): $14.99 per trade
* Additional Per Options Contract Fee of $0.75-$1.75 applies.
E*Trade's price cut came after similar cuts by many online brokerage firms in the last couple of months, including:
- In January, Scottrade reduced limit order commission to $7, the same as market orders.
- Ameritrade launched new IZone service, a bare-bone service that offers $5 internet equity trades. (Ameritrade Streamer offered separately at $9.99/month.)
- Schwab, on February 8, cut base equity trade commission from $12.95, down from $19.95. This applies to accountholders with a balance between $50,000 ad $1 million. (Schwab cut the rate from $29.95 to $19.95 in November.)
- Within a week, Fidelity reduced its silver-level equity trade commission from $14.95 to $10.95.
I currently have the relationship with the following brokerage firms:
- One after-tax account with AmeriTrade, paying $10.95 per trade.
- One after-tax account, and one Roth IRA account with Fidelity, paying $8.00 per trade. (I gained the gold-level status because of employement -- Fidelity is the broker that operates Microsoft 401(k) and ESPP program.)
- One Roth IRA account with BrownCo (a subsidiary of JP Morgan), paying $5 per trade.
As I only trade a limited times every year, there is not much incentive for me to swap ship even the price war continues. After all, I believe frequent trading is a drain of performance for most people. To be eligible for E*Trade's most preferred pricing, one needs to pay out 500 * $6.99 = $3,495 commission a month, or $41,940 a year, as a minimal -- that's a very expensive 4.19% load even on a million-dollar portfolio.
(By the way, did I mention you can actually pay nothing for 20 online trades every month? Take a look at my discussion of Freetrade.)
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I recently stumbled upon your blog. I've enjoyed reading your tips. I'm new to investing and have been doing a lot of reading on the internet this past month.
Now what do you think about Sharebuilder.com and Firstrade.com?
Thank you for reading pfblog. I have an account with Sharebuilder but I have never tried Firstrade. I believe the answer really depends on what kind of investor you are. If you don't plan to trade very frequently, it does not make much a difference even if you choose a low-cost broker. If you decide to manage individual stocks, you probably want to avoid Sharebuilder because of its lack of flexibility.
Thanks for the reply!
Well, I don't plan on being an active trader. I'd like to ease into the stock market a bit.
Right now, my main focus is to start by buying a few mutual funds, maybe through Firstrade, since they have "zero fees" (outside of cashing out the fund). But it seems too good to be true... how do they make money then? I've been reading other boards, and many people think Firstrade will do what Scottrade did and start charging fees all of a sudden.
Regardless, at least for now it seems like a good deal, as long as there really are no commission fees for the mutual funds. So if you have any insight as to how they make money off of this, please feel free to divulge! :)
I can only guess how they can make money. First, some people will inevitably quit their mutual fund positions prematurely to incur the back-loaded fee. Second, some will not always deploy 100% of their account balance in investments, thus allowing the brokerage firm to earn interest on cash balances. Third, Firstrade can earn some "soft money" from mutual funds. Some of these soft money is called 12b-1 fee. Check out this:
http://www.pfblog.com/archives/273_etrade_12b1_rebate_program.shtml.
Make sense?
I've been a member of Schwab (Platinum account) since about 1996. I always answer your questions which you never read or do anything about. I suggested one of the reasons you could lhelp your customers was to LOWER your rates. Now you finally realize this after the Tequesta Office her in Florida has gone under and is down to 2 people now. You were charging $29.95 when others were charging as low as $5. I know Schwab is hurting BAD, I heard it over TV also. Most of your customers have other accounts with the discount brokers, I do. You lowered it to $19.95 now it is getting competative with the real discount brokerage houses. In a way I can't feel sorry for you; you sort of asked for it. NOW you are in a real brokerage war, the market is in the tank. Just thought you would like to lknow.
