Once expected to be casualties of consolidation amid a price war, smaller online brokers are instead thriving.
TradeKing, a Boca Raton, Fla., online brokerage company, established itself five years ago by offering trades for $4.95. Though in recent months both Fidelity Investments and Charles Schwab Corp. have slashed commissions, TradeKing's pricing remains significantly lower. And its pricing structure has enabled the company to grow.
The company had $1.5 billion of assets under management at Dec. 31 after increasing its total accounts 51% last year, to 190,000. Difficult financial conditions had caused a dip from a record 200,000 accounts and $2 billion of assets under management just before the financial meltdown of 2008.
Don Montanaro, the company's chairman and chief executive officer, said he expects more growth this year.
"As we get bigger, it gets harder and harder to beat our percentage growth," he said. "We had 100% growth in our first year, [but] that percentage drops as we grow our base of assets. We know that base is going to rise and fall with the markets, and we clawed back last year."
"A wave of new clients … [is] moving to self-directed investing," he added. "They are the refugees from the full-service brokerage model. I think consumers are tired of giving the keys to their financial future to someone else."
TradeKing and other small discount brokerage companies, like Zecco Holdings Inc., were able to establish themselves with lower commissions. Zecco offers 10 free stock trades per month and $4.50 for subsequent trades. Analysts said that this kind of pricing structure forced larger companies to cut prices.
Bill Doyle, an analyst at Forrester Research, said he thinks online trading commissions will continue to decline.
"They've been falling since 1998, when Schwab cut the cost of online trades from $60 to $30 in an aggressive move online," he said.
"A handful of minor players now offers free trades. But for the big companies, 'free trades' will only be part of relationship pricing, offered to customers who, for example, have significant assets at the firm," he said.
In January, Schwab announced plans to reduce its online-trading commission by 31%, to $8.95. Montanaro said he "applauded" Schwab's decision. Its old pricing model, which let customers with larger account balances trade at a discount, was antiquated, he said.
"There are a few players left with tiered pricing, but it is really a dated practice," he said. "It is hard to believe that anyone can get away with that. I think that it hurts the entire sector when there is confusion."
Larry Freed, the chief executive officer of ForeSee, which produces an annual consumer survey of online brokerage companies, said, "Price is usually not the number one driver" for customers.
"Everyone wants a cheaper price," he said. "But historically, it hasn't driven people away from or toward a certain provider."
Freed said that difficult economic conditions have forced people to consider pricing and, in turn, forced providers to reduce their prices, but in the long term, he said, it may be difficult for companies like Schwab and Fidelity to be profitable at these lower prices.
Neither Schwab nor Fidelity responded to requests for comment.
"Some companies can differentiate themselves on price," Freed said, "but for the most part, that is a difficult path to go down."
"Price is going to remain an important point until the economy starts to grow again," he said. "People are less apt to worry about trading commissions when they are gaining money on a trade than when they are losing money."
Montanaro agreed that companies, including TradeKing, cannot just compete on price.
"I think it is just another thing on the list when you go shopping for an online broker," he said. "I mean, whether it is stocks or blueberries, you want to get the best price. But you aren't going to buy blueberries that are mushy just because they are the cheapest."
TradeKing plans to improve its service model and its education platform.
Last month it introduced a "trading dashboard" that integrates a client's trading activities with the social media functionality of TradeKing's trader network community. This lets customers seamlessly make trades based on the recommendations of other TradeKing account holders.
Some analysts said that smaller providers like TradeKing and Zecco could still be bought by larger ones.
Montanaro said that he expects a "little" more consolidation in the online brokerage world but nothing transformative — and nothing involving TradeKing.
"I think everyone held their breath for a long time wondering if something was going to happen with E-Trade and, though they still have a way to go in terms of cleaning up their balance sheet, there just isn't the same chatter anymore about them being acquired," he said.
"That franchise was hobbled by their banking business," he said, "and that is a tough pill to swallow, but they are hanging on."
E-Trade did not respond to a request for comment.
Montanaro said TradeKing has established itself as a "stable player in a rocky business."
"We are out here," he said. "There is not a lot of word about new firms popping up anymore. I think we've finally reached the point where this industry has stabilized."
TradeKing plans to increase its advertising spending this year after cutting its ad budget in 2009, Montanaro said.
He said he plans to "return to 2008 levels" but would not specify how much the company plans to spend.
"We expect to add 50,000-plus accounts this year," he said. "I'd be disappointed if we don't meet that goal. We came a long way in 2009, but we have a lot more in the pipeline for 2010."