There's No Need For Us To Do Anything …

… said the E-Trade (ET) President and Chief Operating Officer Jarrett Lilien when asked about the bombshell Bank of America  (BAC) dropped last week by offering free online trades to customers who had at least $25,000 in their accounts. I am sure E-Trade investors are hoping that Lilien is right but I distinctly get the feeling that he is suffering from a dose of unbridled optimism. Online discount brokers like TD Ameritrade Holding Corp (AMTD), E Trade (ET) and Charles Schwab Corp (SCHW) have been battling the traditional full service brokers like Goldman Sachs (GS), Merrill Lynch (MER) and Morgan Stanley (MS) as well as each other for years to gain market share through low trading fees and strategic acquisitions. It stands to reason that Bank of America’s free offer to over 21 million qualified customers will have an impact on the discount brokers.

I have used an Ameritrade account for over five years and have also invested in their stock from time to time. The first time I invested in Ameritrade was back in 2002 when Ameritrade announced its decision to acquire privately held Datek Online Holdings, a deal that established Ameritrade as the top online discount broker. While I saw strength in the deal, the stock unfortunately followed the Nasdaq down in 2002 and lost half its value in the ensuing months. I held on to Ameritrade on account of its excellent management team, high insider ownership and margins that are the envy of even the most profitable tech companies. The stock did rebound and I sold it the following year for a handsome profit.

However Ameritrade’s market share was constantly under siege by rivals who were offering lower trading costs. I revisited Ameritrade as an investment early last year after opening an Ameritrade IZone account, which offers $5 trades for both market and limit orders. Clearly at this price point, Ameritrade did not have to worry about losing market share to competitors like, Scottrade or BrownCo, which was acquired by E-Trade last year.

With the acquisition of TD Waterhouse in January 2006, Ameritrade wisely branched into asset management and according to the latest quarterly results, only 39% of revenue now comes from trading. But this is still a significant chunk of change and competitors such as E-Trade and Charles Schwab only derive 27% and 13% of their revenue from trading respectively.

I had been contemplating selling my TD Ameritrade stock over the last few weeks primarily because of a 7% drop in trading in August and my negative outlook for the economy in 2007. I also wanted to take some money off the table because my investment in Ameritrade had appreciated more than 110% (including the $6 per share special dividend that Ameritrade distributed in January 2006) since last April. The Bank of America announcement was the trigger that eventually led me to sell my Ameritrade shares last week.

There is a lot to like about Ameritrade with their excellent margins, the large $113.8 million insider purchase by Chairman and Founder Joe Ricketts just three months ago and an announcement by Ameritrade to buy back 12 million of its own shares. They are also aggressively trying to increase assets under management by offering a free iPod Nano to anyone willing to open and fund an Ameritrade account with $10,000 and recently offering me $1,000 at the San Francisco Money Show to fund my Ameritrade account with $30,000. All I had to do was place five trades within a month of funding my account and keeping the money there for at least nine months.

While I do not see a catastrophic drop in revenue or earnings at Ameritrade right away, I feel that as Bank of America rolls out this offer to all its customers by next February, it will take its toll on the discount brokers like Ameritrade. The market is “forward looking” and there is a good chance that Ameritrade will continue trending lower over the next few months.


  1. Retail Investor
    October 24, 2006 at 12:00 am


    – What your thoughts/comments on Jim Cramer’s recent take on the BoA announcement (check out his stop trading and Real Money Radio segments from 10/23)? I have to agree with his comments that you need to read the fine print in the BoA announcement and do not believe that smart traders will bite the bait and move over to BoA keeping $25000 under seige for nearly no interest. I know that personally, I am not moving to BoA based on this announcement and I am going to assume that you are not either.

    – Comments/Thoughts on the AMTD earnings announcement this morning? The stock is down 3% pre-market but the earnings were pretty impressive.

    – Lastly, I have participated in a lot of the Ameritrade/Waterhouse incentives in the past and will continue to do so. The only catch is that you need to find the ‘secret URL’ to sign up for the deals… Maybe you can post the iPod Nano give away URL and more interestingly the $1,000 give away on $30,000 for 9 months URL (you could use that as a savings account that pays 4.45% + their regular base interest rate of 1.65% = 6.1% interest for 9 months.

  2. Uncle Bill
    November 6, 2006 at 12:00 am

    Do you know anything about They are offering free trades. Would be interested in your take on them.


  3. Asif
    November 6, 2006 at 12:00 am

    I heard about when they contacted me a couple of months ago to write for their website. I like their concept of offering free trades and commentary. They also made a very fair offer of sharing advertising revenue with authors who write for them.

    The key drawback I see with Zecco is the lack of an established and trusted name and that is going to hold back some investors who usually tend to be a cautious lot. It will be interesting to see if their business model succeeds.

    On the other end of the spectrum is Wells Fargo, which has been offering 50 commission free trades per year to investors with over $250,000 in assets.   

  4. Dan
    November 15, 2006 at 12:00 am

    I believe we are clearly assisting at a long term trend of disintermediation in the industry that will drive commisions down, even though very low commission rates are not new to the industry (look at Interactive Brokers).

    However many online discount brokers already worked in order to decrease their dependency from trading commissions. Nevertheless I’d have a look at optionsXpress (OXPS). They derive approximately 70% of sales from commissions and 20% of sales from “payments for order flows” – payments received when you provide liquidity to the option market and that are going to gradually disappear with the move towards lower bid / ask spreads on the market (down to $0.01 from the current level of $0.05). I believe this company will be more affected by the disintermediation than all the other discount brokers

  5. Miles Wolbe
    December 3, 2006 at 12:00 am

    Aloha, Asif! Can you please tell me what online broker(s) or trading platforms (TradeStation, CyberTrader, etc) you use/recommend?

  6. Asif
    December 3, 2006 at 12:00 am

    Aloha, Miles. The online broker I use and would recommend is TD Ameritrade. I have used both the $9.99 per trade regular TD Ameritrade account and the stripped down version Ameritrade Izone that offers $5 trades (market as well as limit orders) and have been happy with the service and trade execution.

    The Izone account requires a minimum investment of $5,000 but I view that as a good thing as you do not want to start investing unless you have at least 3 to 6 months of living expenses in cash to handle emergencies.

    Some of the new brokers like TradeKing and Sogo Invest offer very competitive trading rates but I have not used them.

    I hope this helps.

  7. Miles Wolbe
    December 4, 2006 at 12:00 am

    Thanks for the quick reply, Asif! A few days ago, I watched a friend using TradeStation and was amazed at how quickly buy and sell orders went through (roughly 1 to 2 seconds!). I have been using Scottrade and it takes *much* longer for a transaction to be finalized. How quickly are orders completed with Ameritrade?

  8. Asif
    December 4, 2006 at 12:00 am

    Miles, since I do not trade very often I do not use any specialized trading tools other than live streaming quotes and screening software.

    As you observed, order execution is a very important factor when choosing a broker and I have generally been happy with the order execution on Ameritrade. The time it takes to execute an order does depend on the liquidity of the stock or option you are trying to trade, the number of shares you are trying to buy and whether your order is a market or a limit order. For example 40 million shares of Oracle (ORCL) exchange hands every day when compared to about 450,000 for Tata Motors (TTM) or a miniscule 14,000 for RCM Technologies (RCMT). 

    I have seen Ameritrade split my order into chunks (I am sure other brokers do this as well) to try to get them filled at the best possible rate. On the other hand, when I was trying to buy put options on the mortgage REIT New Century Financial (NEW) a couple of weeks ago, my order did not get filled until the end of the day because of low volume.

  9. Miles Wolbe
    December 4, 2006 at 12:00 am

    Thanks for your reply, Asif! Izone looks good – thanks for the link and info. I like their free Trade Triggers service ("It’s easy to set alerts or orders in advance based on certain market conditions and your trading strategy. When the market condition you specify is met, you’ll get an alert or your order will be entered. Automatically. Even if it’s days or weeks later. Perfect for traders in western or international time zones, or for people who cannot be at their computer during trading hours."). And thanks for maintaining such an excellent blog/newsletter!

  10. Miles Wolbe
    December 5, 2006 at 12:00 am

    One last thing: I just stumbled onto this blog entry about trade execution:

    Here is a snipet:

    Sample Trade Execution Ratings (out of 5, higher is better)

    MB Trading – 4.8

    Fidelity – 4.4

    E-Trade ‘Serious Investor’ – 4.2

    Scottrade – 4.1

    TradeKing – 3.8

    Schwab – 3.7

    Ameritrade I-Zone – 3.4

    FirsTrade – 2.8



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