Comparison: On-Line Discount Brokers 2007
by AAII Staff
The bar chart in Figure 1 traces the growth and subsequent decline in the number of on-line discount brokerage firms over the last 16 years. A big jump took place in 1996, soon after the launch of the first Internet-based broker.
During 2006, TD Waterhouse and Ameritrade merged to create TD Ameritrade. Although it looks as though the consolidation trend is cooling, some industry experts believe it is just beginning to heat up. Many customers of merged and acquired firms can be frustrated with new Web sites, and different commission schedules and service options. While there will always be hiccups as firms transition, keep in mind that you are not obligated to stay with the new firm. If the commission schedules are costing you more or service is not up to par with what you need, there are plenty of other options out there. Our annual On-Line Discount Broker Guide compares 47 firms this year.
In recent years, security of client information and the ability of hackers to access accounts has been a huge issue with investors. Firms are constantly battling high-tech hackers with new and improved security measures. This past year, many E*Trade and TD Ameritrade customers were victims of hackers making unauthorized trades worth millions of dollars. Both firms have guaranteed loss coverage, even though they are not required to do so by law.
A typical scam involved hackers obtaining data from public computers. An obvious way to evade such a scam is to not use public computers to make trades. E-mails directing you to a fake Web site (it may look real) to verify password and account information are also used to obtain personal information. Be sure to verify the validity of an E-mail before linking to a Web site from it.
Heightened competition has led many brokers to become niche players in order to differentiate themselves. Brokers seeking active stock traders have a different cost structure, research offerings and order-entry process than a broker acting as a one-stop center for investors seeking banking services, financial planning and portfolio management.
Figure 2 shows on-line commission trends for a 100-share market order. As discount brokers first ventured on-line, these commissions decreased slightly. The late 1990s, however, saw a significant decline in commission fees, with the average minimum commission decreasing from $40 in 1995 to $20 by 1998. The rapid decline can be attributed to the growing number of on-line brokers and increased competition. Commissions have remained stable in recent years; however, this year the average commission dropped from $17.16 per trade in 2006 to $14.54 per trade. The big drop can be attributed in part to the new entry, Zecco.com, which offers free trades.
Commission rates have settled into three segments closely matching the highest, lowest and average commissions in the chart. About one third of the brokers are deep discounters offering market orders below $10 per trade. Full-service discount brokers offering a wide range of securities and services charge about $10 to $30 per trade. Five brokers continue to use a scaled commission schedule rooted in the pre-Internet world. Since last year, Fidelity and T. Rowe Price have joined the majority and now offer flat-fee commission rates.
The highest commission broker this year continues to be Max Ule at $156 per trade for 500 shares. The newbie, Zecco.com, charges no fee for up to 10 trades per day and up to 40 trades per month; beyond these limits the fee is $3.50 per trade. In a new twist, Banc of America is offering zero commissions for customers with bank deposits of $25,000 or more.
Brokerage firms generate revenue from many sources beyond commissions, including payments from dealers to execute trades, mark-up between bid and ask prices, and lending securities and money. Because most brokerage firms offer low commission rates, it is difficult to attract customers on price alone. Many brokers have additional features such as research tools, better rates for active traders, after-hours trading, direct access trading (see the box on page 18 for more on direct access brokers), and brick-and-mortar brokerage offices. In the past, research tools and real-time quotes were used to gain a competitive advantage, but now investors can access these services on various financial Web sites—some free—making it necessary for on-line brokers to offer these tools to stay competitive. The comparison grid starting on page 12 details these services and lists any fees charged.
While the data shown in the comparison grid is supplied to us directly from each broker, always verify the information presented here by contacting the brokers before making any final decisions.
A flexible trading system is a key component in the evaluation of any broker’s offerings. If the firm’s Web site is down due to heavy trading volume or technical problems and you can’t access your account, other trading venues such as a touch-tone phone service become very valuable.
In the comparison grid, the Other Trading Options section shows alternatives to Internet trading. Eighteen brokers offer trading via touch-tone telephone service. Touch-tone service allows trades to be placed over the telephone using the phone keypad. Discounts and commission schedules offered for on-line trading typically also apply to touch-tone trading.
In addition to placing trades through the firm’s Web site with a computer, some brokers allow you to trade on-line using personal digital assistants (PDAs) and cell phones. PDAs are popular tools for contact and task management and some handle spreadsheets, basic software applications and games, making them essentially handheld PCs. For investors on the go, these have become the standard for wireless trading. A number of larger brokers also offer support for trading through Blackberry RIM handhelds. Eighteen of the brokers offer trading through wireless hand-held systems and Web-enabled cell phones.
The Flat-Fee Commission Rate and Maximum Number of Shares at Flat Rate columns should serve as the base for any commission analysis. If the broker does not offer a flat-rate schedule, then “n/a” appears. A sample trade of 500 shares at $50 per share is presented, along with what percentage of the total transaction the commission represents, to allow comparison with brokers that do not have flat-fee schedules. The chart also indicates any additional charge for limit orders (set price or better).
For example, myTrack charges a flat fee of $12.95 for a market order of up to 20,000 shares. An additional $3 fee is charged for trades placed as limit orders. MB Trading, a firm that does not use a flat-fee commission schedule, charges $0.01 per share for the first 500 shares and a $0.005 per share thereafter. This means the commission cost for 500 shares at $50 per share is $5.
The figures entered in the Minimum Fee for No-Load Mutual Fund Transaction column are calculated by figuring the associated commission of purchasing one share at $1.
Because all of the brokers included handle stock trades, this is not a column in the grid under Other Securities Handled. Twenty-three of the firms allow you to trade bonds. With the exception of U.S. Treasuries, the bond market is very fragmented and therefore less suited toward simple on-line order entry systems. Most of the brokerage firms (36) allow you to trade mutual funds, and all trade options. Unfortunately, only 10 of the firms in this year’s survey allow the trading of futures contracts on-line. This is primarily due to the highly leveraged nature of futures and their accompanying liability concerns.
As commission structures vary for different types of securities, be sure to ask for a detailed commission schedule from any potential broker and review it carefully. Most brokers describe basic commissions and fees on their Web site; however, you may have to contact the firm directly for details involving specific situations.
A cash management account consists of basic banking services within a brokerage account and offers services such as direct deposit, check writing, wire transfers, debit card usage and sweep account capabilities. Almost three-fourths of the brokers offer a cash management account.
All of the brokers allow market, limit and stop orders to be placed on-line. The simplest, a market order, is executed immediately at the best available price. Before placing a trade, it is important to first examine the market price by looking at the last trade price and its time of execution, current bid/ask spread, size of these offers and volume. While a market order offers the quickest and surest way to accomplish a trade, it comes with the risk that a quickly moving or thinly traded market may lead to a poor execution price.
A limit order reduces that risk by setting the minimum price an investor is willing to sell a security at, or the maximum price that an investor is willing to pay to purchase a security. The flat-fee commission rates in the table are based on placing market orders. The grid indicates any additional fee per trade to place limit orders.
Stop orders are also tied to market movements. While a limit order establishes a set price or better, a stop order becomes a market order when the security’s price hits the stop price. This order will then be filled at the prevailing market price, with no guarantee of a specific price.
Length of time can also be assigned to on-line orders, such as a day order (good through that day only) or good-until-canceled (usually good through the end of the month in which the transaction was placed). Short-selling involves selling un-owned shares of stock. Short sellers reap a profit when the stock price declines by borrowing stock and selling it first, then buying the stock later at a lower price and returning the borrowed shares. Brokerage firms have the ability to lend shares held by the broker in margin accounts of other customers.
A do-not-reduce order is an instruction not to automatically reduce a stop or limit order by the amount of the dividend when a stock goes ex-dividend. A versus purchase order is used to specify which lots are to be sold. This helps individuals limit tax liability by allowing them to sell shares that were purchased at a specific price. Once an order is placed, all but two of the brokers allow you to review and change the order on-line provided that the trade was not executed.
The Confirmation of Order Fulfillment Delivered section refers to the notification of a recently filled order. An order fulfillment confirmation can appear on-line at a designated area of the broker’s Web site, or it can arrive in your inbox via E-mail. Confirmations also come in the form of a telephone call or can be sent via regular mail.
In most cases, more than one means of receiving confirmation is available. All of the brokers offer an on-line notification either through an on-line link or via an E-mail; all but two send out confirmations via regular mail. Over half of the brokers offer to call with a confirmation of the fulfillment of the trade.
Immediate access to account information is a huge benefit of on-line trading. Easy access to this data allows you to see how much cash is available to purchase new securities and to view the positions of securities you currently own.
In addition to reporting on the availability of cash balances and positions, this section of the comparison grid also indicates which on-line brokers provide a record of dividends received from your securities and a detailed ledger of your account transactions. Additionally, the comparison grid denotes the historical time period of the transaction ledger available on-line. The reference “since inception” refers to a transaction ledger showing all activity since the account was opened. CyberTrader is the only broker that does not provide a record of dividends received. All firms offer a historical record of transactions on-line; 10 offer a record of all transactions since inception. Three quarters of the brokers allow customers to download transactions into Excel or a portfolio management software program such as Quicken or Microsoft Money. This can be a great time-saving feature when it works properly.
The brokers were also asked how soon portfolio information is updated following a transaction or change in the portfolio holdings or cash account. Real-time (RT in the grid) means portfolio data is updated immediately following a change. Intraday (ID) updating is on a delayed basis, such as a 15-minute delay or updated once every hour. End-of-day (ED) simply means that changes to the portfolio would not be reflected in investor’s records until the next trading day. An EM in this column denotes brokers who offer E-mail updates on your portfolio value.
A few years ago, CheckFree, Intuit and Microsoft established a common standard to transfer account information among brokerage firms called Open Financial Exchange (OFX). The purpose of OFX is the electronic exchange of financial data between financial institutions, businesses and consumers via the Internet. Twenty-one brokerage firms reported offering OFX, up from 17 last year. These brokers store historical trade information on an OFX server that can be imported into portfolio management and tax preparation services and products. Services such as GainsKeeper, Quicken.com and Yahoo! Finance have the ability to import portfolio data from the brokers that offer OFX.
Current securities quotes are a vital part of placing a trade. To make informed trading decisions, you need up-to-date data. The bid/ask price refers to the spread between the highest price bid to purchase and the lowest price offered to sell a stock. Last trade denotes the price at which the security last traded. Volume is the total shares of a particular security that have changed hands. The availability of daily price highs and lows as well as 52-week highs and lows is another important feature in determining a security’s relative price standpoint and volatility.
The quotes section is broken down by the type of quotes offered—delayed (DY), streaming real-time(ST RT), real-time (RT), and NASDAQ Level II (NLII). Streaming real-time quotes give you a continuous stream of updated bid and ask prices versus real-time, which means having to manually refresh for the most recent bid and ask prices. Twenty-nine firms offer streaming real-time quotes, 17 for free. CyberTrader, JH Darbie & Co., and TradeKing now offer streaming real-time quotes, CyberTrader for free. In the past, real-time quotes were expensive and rarely offered for free. However, they are now a cost of being competitive and 36 firms offer free real-time quotes. Fees for streaming real-time, real-time and NASDAQ Level II quotes are most often charged on monthly basis. Four firms, Cambridge Discount Brokerage, First Financial Equity Corp., Securities Research, and Sherry Bruce’s State Discount Brokers only provide delayed quotes.
In addition to touch-tone or wireless trading, the availability of “live” brokers adds flexibility to a brokerage firm’s trading system. On-line brokers maintain a staff of live brokers to take orders over the phone. In some cases, commission fees are higher for this type of broker-assisted trade.
Slightly more than half of the on-line brokers offer access to the markets before the open or after the close via after-hours trading sessions.
After-hours trading utilizes computerized order matching systems known as electronic communications networks (ECNs). These sessions are completely independent from standard market-hours trading. The trading interface is usually different and only special after-hours representatives can take orders. After-hours sessions mostly occur after the markets close and in some cases, before the markets open. A certain degree of liquidity must be present for a security to be traded during these after-hours sessions. Most Nasdaq 100 stocks and heavily traded New York Stock Exchange stocks are eligible candidates. There are limitations on the types of orders and size of orders that can be placed. Specific guidelines and rules differ from broker to broker. The key is finding another investor to fill the other end of the trade at a favorable price.
A list of specific services and capabilities we feel are important to investors has been compiled for comparison purposes. The categories of free research offered on-line include portfolio tracking, news, charts, historical price data, stock and mutual fund screening, fundamental data, earnings estimates, analyst reports, and mutual fund ratings and performance data. Free company charts and news are more common than free stock or mutual fund screening.
A demonstration version of a software program allows you to test the features and functionality and gauge the ease-of-use before committing to buy it. Many on-line discount brokers offer demos of their trading modules on-line. Brokers who offer a trading demo give potential customers access to a sample of the site’s trading area where they can test drive the site and see how user-friendly the module is. Some demos allow information to be entered, buttons to be clicked and the order fill process to be experienced, while others are simply slide shows illustrating the process.
Either type of demo is an invaluable tool and demos are offered by 38 brokers in this comparison. The column reporting those firms that offer a trading demo appears at the end of the table and wraps up the comparison grid.
If you are in the process of reviewing several on-line discount brokers as possible trading service providers, the issues covered here help to create a good foundation on which to build. One area that all potential customers should consider—but that is virtually impossible to quantify in a comparison of this scope—is the type and quality of support received when problems or questions arise. Focus on the firm’s phone support and E-mail responses. Be sure to call prospective brokers and ask the representative questions, request literature detailing services and fees, E-mail the firm the same questions and be sure to check their Web site for general information. Compare the information received from each of these sources for consistency.
Consulting friends and peers with experience in on-line trading is a great way to get honest feedback about a potential brokerage firm. And finally, check out the on-line trading discussions in chat rooms and on message boards.
For the past several years, we have offered a survey for AAII members regarding discount brokers. The questionnaire gives you a chance to share experiences and learn how other members feel about their brokers. We are extremely pleased with the volume of responses we receive each year. This issue includes a discussion of the results of this survey over the past five years on page 6.
If you have worked with an on-line brokerage firm in this year’s comparison, please take a minute to log onto AAII.com and answer a few questions and share your experiences. The questionnaire can be found under Investor Surveys. Again, as in years past, results are posted and continually updated. All responses are anonymous.
|Direct Access Brokers|
In recent years, on-line brokerage firms have begun to offer direct access to the market via a direct access brokerage platform. Fifteen brokers in the survey this year offer direct access trading. New this year, TD Ameritrade, which was created by a merger between TD Waterhouse and Ameritrade, offers the service. Previously, TD Waterhouse allowed direct access trading but Ameritrade did not.
Having direct access to the markets essentially cuts out the middle man, which has multiple advantages. The Web interface used by traditional on-line brokers tends to be slower than the software interface used by direct access brokers giving you the ability to make faster trades.
Additionally, placing trades with a traditional on-line broker is a multi-step process. After an order is placed, usually via an E-mail type message, the order is executed by a broker who decides which exchange the order is sent to (usually a pre-determined path for all orders). Direct access brokers, however, give you the ability to send orders directly to the market, which saves time, and to choose the exchange the order is sent to, giving you more price control.
A potential advantage of having the ability to choose an exchange is the possibility for price improvement. The order can be sent to the exchange you think will offer the best price and quickest execution.
For active traders, direct access brokers provide more control over the outcome of trades. In the past, most brokers charged a monthly fee for software but waived or reduced the fee if a certain number of trades were made each month. Each year, the number of firms charging a software fee has declined. Only six firms in this year’s survey charge a fee. CyberTrader charges the highest fee for software again this year—$249 per month. The fee is waived if over 40 trades are made each month. InvestIN Securities Corp. is the only firm that does not waive the software fee based on monthly trade activity.
For many firms, commission fees are the same for the direct access broker and the traditional on-line broker. Interactive Brokers and MB Trading charge the lowest commissions per trade: $0.005 and $0.01 per share, respectively.
Additionally, because you have the ability to choose the exchange on which the stock is traded, you are sometimes charged an exchange (or ECN) fee. Fees range between $0.001 and $0.004 per share, depending on the exchange. Almost half of the firms on this list do not charge an additional exchange fee as those costs are factored into the quoted commission rates.
The data in this table comes directly from the brokerage firm. However, always check the Web site and talk with company representatives as commission schedules and offerings may change.