The WSJ reports that Ameritrade is testing a bare-bones online brokerage service called IZone at ameritradeizone.com. Stock trades cost only $5, but customers don't get real time quotes, research, news or investing tools. Real time quotes cost $9.99 per month, and news and research also involve extra fees. The service is available to investors with at least two years investing experience and a minimum opening balance of $5,000. Ameritrade rolled out the trial about two weeks ago with a direct-mail campaign in New York and radio and local newspaper ads in Los Angeles, Chicago, Denver and Phoenix.
1. This isn't so new: Ameritrade already offers a bare bones trading service (Freedtrade) with zero commissions on the first 20 trades each month.
Online brokers will only escape continuing price wars by offering
better functionality to investors. In practice that means integrated
services covering customers' broad financial needs, including
investing, banking, insurance, credit cards and retirement planning. In
that respect, E*Trade is ahead of its competitors.
3. A price
war will hit the firms with the highest costs hardest. Bad news for
Schwab, which has a bloated expense structure and has steadily lost accounts.
A price war will ultimately lead to further consolidation in the
industry, as mergers are the fastest way to remove costs and increase
scale. Likely acquisition targets? TD Waterhouse (it will be forced to
return to the negotiating table) and Scottrade.
5. The trading commission price war benefits providers of exchange-traded funds (ETFs). ETFs have advantages over mutual funds
(platform independence, tax efficiency, transparency, and greater
flexibility for tax-loss selling and portfolio rebalancing), but also
suffer from disadvantages (spreads, trading commissions and tracking
error). Lower trading commissions almost eliminate one of the
disadvantages of ETFs.
Full disclosure: at the time of writing I'm long ET, short SCH.