The year 2008 proved to be one that none of us will soon forget. While in past years, the broker scene was peppered with mergers and acquisitions and Internet security issues, this year the biggest story was the market itself. With a 38.7% decline in the overall market for 2008, as measured by the Dow Jones Wilshire 5000 index, investors had few places to hide during this turmoil. Due to the market unrest, a number of large and small financial institutions ran into money troubles. Some firms were bought out, some were left to file for bankruptcy and others were bailed out by the federal government.
As with most years, our annual survey finds some firms no longer operating and others that have merged. Bank of America declined to be included this year because the firm’s pricing and commission schedules will change in 2009 due to the acquisition of Merrill Lynch (a firm that has not been included in the AAII survey because it is not a discount broker). The firm is expected to participate in next year’s survey.
The bar chart in Figure 1 traces the growth and subsequent decline in the number of on-line discount brokerage firms over the last 17 years. A big jump took place in 1996, soon after the launch of the first Internet-based broker. The largest number of firms, 77, participated in the 2002 survey. That number has steadily declined due to industry consolidation.
This year, 43 firms are included in the survey. Six new firms joined the group this year: ChoiceTrade, OptionsHouse, trade MONSTER, Trade Wall Street Financial, Wolf Popper Financial and Zions Direct. In addition to Bank of America, five firms were eliminated from the group this year. Fimat USA merged with another firm and created a new brokerage firm that services only institutional investors, and InvestIN Securities is no longer in business. First Discount Brokerage, Freedom Investments, and optionsXpress missed the deadline for participating this year.
In addition to the market’s performance, another big story emerged at the end of 2008: Money manager Bernard Madoff is at the center of an alleged $50 billion Ponzi scheme. While there were many red flags along the way, some investors chose to ignore them and, as some claim, so did the Securities and Exchange Commission. The SEC has said that it was aware of numerous red flags raised about Bernard L. Madoff Investment Securities LLC. The firm was investigated, but no wrongdoing was found.
Investors are right to be concerned about their brokerage firms. However, the firms listed in this comparison all offer SIPC insurance and many provide additional coverage as well. While SIPC insurance does not cover losses due to market movements or bad investment choices, it does cover investors if a brokerage firm goes bankrupt or for some other reason is unable to pay out current values to clients. Because Madoff ran a hedge fund, it is not covered by the SIPC insurance, or even legally regulated by the SEC, and most investors are out of luck.
This is a good time to learn a few lessons that can be applied to finding a new broker. First, always invest with a brokerage firm that offers SIPC insurance. Second, hedge funds are tempting, but risky and should only be invested in after much research into the company, its managers and their investment strategy. Third, if the returns of a security sound too good to be true, they probably are. Madoff’s fake hedge fund gained every year, even in market downturns. Even great money managers will see down years.
And finally, it is always good to be reminded of safety issues with on-line brokerage firms. A typical scam involves 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. Never go to a Web site via a link in an E-mail. Type in the site’s Web address yourself to access the site.
Figure 2 shows on-line commission trends for a 100-share market order. The late 1990s saw a significant decline in commission fees, with the average minimum commission decreasing from $40 in 1995 to $18 by 2000. 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 slightly from $14.49 per trade on-line in 2008 to $13.49 per trade on-line this year.
Commission rates have settled into three segments closely matching the highest, lowest and average commissions in the chart. Deep-discount brokers charging less that $10 per trade on-line account for just over half of the firms. Eighteen are full-service discount brokers that offer a wide range of securities and services; these charge mid-range prices of between $10 and $30 per trade on-line. Three brokers continue to use no-flat rate commission schedules, but one of these firms, Interactive Brokers, offers one of the lowest rates: a 500-share trade on-line costs $2.50.
Nineteen of the brokers who offer a flat-rate allow you to trade unlimited shares at the flat-rate. TradingDirect sets the maximum at one million shares, LowTrades at 500,000 shares, OptionsHouse at 50,000, TrackData at 20,000, and Merrimac Direct Investments at 10,000. The rest of the firms have share limits in the 500 to 5,000 range for their flat-rate pricing.
The highest commission broker this year remains Saturna Brokerage Services at $62.50 for trading 500 shares on-line. Zecco.com charges no fee for up to 10 trades per month for those with account balances of over $2,500. The fee is $4.50 per trade otherwise.
Because most brokerage firms offer low commission rates, it is difficult to attract customers on price alone. Many brokers have additional features including research tools, different commission schedules for various types of 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. The Internet has made access to research tools and real-time quotes simple and, in many cases, free. While these used to be offered as a means of differentiation, it is now almost necessary for on-line brokers to offer these services to stay competitive. The comparison grid on pages 12 to 16 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.
Having access to multiple avenues for making trades is an important criterion to consider. If a 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. Some traders find it helpful to have multiple brokers, so if one site goes down they can still trade on another.
This issue points to another important criterion: the various order types a firm can handle. For example, if you have placed a market order and the firm is having a technical glitch, you may not be able to cancel that order if the price rises or falls to an inappropriate level. A limit order could get around some of this, but if the site is down, no trades are going through. Order types are discussed in more detail later.
Alternatives to Internet trading are listed in the comparison grid in the Other Trading Options section. Seventeen 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 using your PC or laptop, some brokers allow you to trade on-line using personal digital assistants PDAs and cell phones. For many investors on the go, these have become the standard for wireless trading. A number of larger brokers also offer support for trading through RIM Blackberry handhelds. Seventeen of the brokers offer trading through wireless hand-held systems and Web-enabled cell phones.
Over the years, a number of firms have been offering traders direct access to the market via a direct access brokerage platform. Since we first started tracking direct access brokers in 2005, the number of firms offering this service has grown from 12 to 18 this year. ChoiceTrade, JH Darbie & Co., thinkorswim, Trade Wall Street Financial and Wolf Popper Financial join the list this year. Fimat USA and InvestIN Securities were included last year but are no longer offering services to individual investors.
With a traditional on-line broker, an order is placed, usually via an E-mail or on-line form. Next, the order is executed by a broker who decides which exchange the order is sent to (there is usually a default path for all orders).
Direct access to the market can provide a number of advantages to individual investors by cutting out the middle man. This allows you to choose the exchange on which the trade is executed, make trades more quickly, and have more control over the trade price. Active traders with direct access to the markets have more control over the outcome of their trades.
Some brokers charge a monthly fee for software but waive or reduce the fee if a certain number of trades are made each month. Half of the firms on our list charge no fee for direct access trading, and the others will waive fees with a minimum number of monthly trades.
Again, MasterTrader (previously called MTDirect) charges the highest fee for software—up to $250 per month—but waives the fee if over 50 trades are made per month. The broker also has a free Web-based direct access trading platform if over four trades are made per month.
TradeStation Securities is not a traditional on-line discount broker—it only provides a software program for direct access trading. The fee for software is $99.95 per month, and it includes strategy testing and analysis as well as automated trading.
The brokers mostly offer flat commission rates based on the number of trades you make. TradeStation Securities offers one of the lowest per trade commissions at $0.01 per share for up to 500 shares and $0.006 per share after. MB Trading offers a choice of a per share commission of $0.01 for up to 500 shares and $0.005 per share after, or a flat rate of $4.95 per trade. MasterTrader has the highest per trade rate of $14.95; however, they offers volume discounts.
Because you have the ability to choose the exchange on which the stock is traded, the brokers will sometimes charge an exchange (or ECN) fee. Fees range between $0.002 and $0.004 per share depending on the exchange. Seven of the firms on this list do not charge an additional exchange fee as those costs are factored into their quoted commission rates.
A new question this year for the brokers focused on compatibility of the trading software for Mac users. Nine of the systems are accessible using a Mac or a Windows-based PC.
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.
|Commission (per Trade)||
|A. B. Watley Direct||$50||11||$6.95–$9.95||?||www.abwatley.com|
|Charles Schwab||n/a||n/a||$8.95 (+$0.003/sh>5,000sh)||?||?||www.schwab.com|
|ChoiceTrade||$29–$84||100||$5 or $0.01/sh||?||www.choicetrade.com|
|Fidelity Brokerage Services, LLC||$0||n/a||$8.00 (+ $0.005/sh >1,000)||www.fidelity.com|
|Interactive Brokers, LLC||n/a||n/a||$0.005/share||?||www.interactivebrokers.com|
|Investrade Discount Securities||negotiable||20||$7.95||?||www.investrade.com|
|JH Darbie & Co.||$0||n/a||$9.99 or per share||?||?||www.jhdarbie.com|
|MB Trading||n/a||n/a||$0.01/sh ($0.005/sh>500sh) or $4.95||www.mbtrading.com|
|Online Broker Serv (MyTradz.com)||$69.95||25||$7.95–$12.95||?||www.mytradz.com|
|Trade Wall Street Financial||$99||25||$9.99||www.tradewallstreet.com|
|TradeStation Securities||$99.95||5,000 shares/mo.||$0.01/share ($0.006>500 sh)||www.tradestation.com|
|Wolf Popper Financial||$0||n/a||$9.99 or per share||?||?||www.wolfpopperfinancial.com|
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. To allow for comparison with brokerage fees that do not have flat-fee schedules, the percentage of the total transaction the commission represents is presented. The chart also indicates any additional charge for limit orders (set price or better).
For example, Interactive Brokers, which does not have a flat rate commission schedule, charges $0.005 per share, with a minimum charge of $1.00. The sample trade of 500 shares would cost $2.50. T. Rowe Price offers a flat rate of $19.95 per trade for up to 1,000 shares, and $0.02 per share after. This means a 2,000 share trade would cost $19.95 for the first 1,000 shares and $20 for the remaining 1,000 share for a total of $39.95.
The figures in the Minimum Fee for No-Load Mutual Fund Transaction column are calculated by figuring the associated commission of purchasing one share at $1.
All of the brokers included in the survey handle stock trades, so this is not a column in the grid. Twenty-one 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 (37) allow you to trade mutual funds, and all but one (SogoTrade) to trade options. Unfortunately, only eight 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.
Commission schedules vary for different types of securities so be sure to ask for a detailed commission schedule from any potential broker and review it carefully. The broker’s Web site is a great place to get basic commission schedules and fees. This might also provide you with more updated data than a brochure or even this survey since it can be constantly updated on-line. For more complex trading situations, you may have to contact the firm directly.
A cash management account refers to basic banking services within a brokerage account. Typically you can have funds directly deposited, write checks, wire transfer money, use a debit card and have access to sweep accounts. Sixty percent of the brokers offer a cash management account.
A market order is the simplest order type: it is executed immediately at the best available price. It is the most common order type and all firms allow for this order, therefore it is not included in the chart. Before placing a trade, you should be sure to examine the market price by looking at the time and price of the last trade, the current bid/ask spread, the sizes of these offers, and the volume. A market order offers the quickest and surest way to accomplish a trade, but a quickly moving or thinly traded market may lead to a poor execution price.
All of the firms allow for limit orders and seven firms charge an additional fee for placing limit orders. Fees range from $3 to $7 per order.
A limit order sets the minimum price at which an investor is willing to sell a security, or the maximum price 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 fees to place limit orders.
Another order type to consider is a stop order, which is 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. The order will then be filled at the prevailing market price, with no guarantee of a specific price.
A trailing-stop order is a stop-loss order in which the stop-loss price is set at a fixed percentage below the market price. If the market price rises, the stop-loss price rises proportionately, but if the stock price falls, the stop-loss price doesn’t change. This technique allows an investor to set a limit on the maximum possible loss without setting a limit on the maximum possible gain, and without constant monitoring. Twenty-four firms allow customers to place trailing stop orders.
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 received a lot of press this year due to the big market declines. This strategy bets on a stock losing value. Some analysts and commentators blamed investors who shorted stocks for exacerbating the market downturn. On September 19, 2008, the SEC took the unprecedented action of temporarily banning the short selling of stocks of close to 800 financial institutions.
Short selling involves selling un-owned shares of stock. Short sellers earn 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 applies when a company pays a dividend. This order type is an instruction to not 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 at the broker’s Web site, or can be sent to you via E-mail. Confirmations can also come in the form of a telephone call or 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 three-fourths 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 the positions of securities currently owned.
In addition to current portfolio and cash values, this section of the comparison grid indicates which on-line brokers provide a record of dividends received and a detailed ledger of your transactions, as well as the time period of the transaction ledger available on-line. All firms offer a historical record of transactions on-line. “Since inception” means you can see all of the activity in your account since the day it was opened; seven firms offer this. OptionsHouse vaguely reported that their transaction history goes back “indefinitely” and Trading Direct offers transactions data going back to 2002. York Securities offers the shortest time period for transactions history—only 30 days.
All but three firms 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.
CheckFree, Intuit and Microsoft have a common standard to transfer account information among brokerage firms, called Open Financial Exchange. (Quicken uses a variant of this called Quicken Financial Exchange or QFX.) This allows for the secure electronic exchange of financial data between financial institutions, businesses and consumers via the Internet. Twenty-two brokerage firms reported offering OFX this year. These brokers store historical trade information on an OFX server that can be imported into portfolio management and tax preparation services and products. Portfolio tools from a number of Web sites and software providers such as GainsKeeper, Quicken.com, Money, and Yahoo! Finance have the ability to import portfolio data from the brokers that offer OFX. This can be a great time-saving feature for people using portfolio management tools. However, be aware that most OFX transfers do not cover your account since inception. Typically you can download data from the past 18 months.
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. All but four offer real-time updates.
Current quotes play a vital role in maintaining a portfolio and placing trades. In order to make informed trading decisions, up-to-date data is essential.
The bid/ask price refers to the spread between the highest price an investor is willing to payand the lowest price at which an investor is willing to sell . 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. In the past real-time quotes were rarely offered for free, but they have become a cost for brokers to remain competitive. Thirty-seven firms offer real-time quotes for free. Twenty-nine firms offer streaming real-time quotes, 16 for free. Fees for streaming real-time, real-time and NASDAQ Level II quotes are most often charged on monthly basis.
In addition to touch-tone or wireless trading, the availability of a “live” broker 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 requires special after-hours representatives to take orders. After-hours sessions occur both before and after regular market hours.
A certain degree of liquidity must be present for a security to be traded during these after-hours sessions. Most heavily traded New York Stock Exchange and NASDAQ stocks are eligible candidates. There are limitations on the types of orders and size of orders that can be placed and specific guidelines and rules differ from broker to broker. The key to after-hours trading 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.
Many of the featured brokers offer demonstration versions of their trading modules on-line. This gives potential customers access to a sample of the site’s trading area and lets them test drive the site to see how user-friendly it 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 is offered by 33 brokers in this comparison.
This year we asked the brokers if their Web sites were accessible from a Windows PC, Mac or both. Seven firms said their site was either inaccessible for Mac users or offered different, often lesser, functionality for Mac users. Firms with a checkmark in this column have sites that are compatible for both Windows and Mac users.
If you are in the process of reviewing several on-line discount brokers, 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 hard to quantify in a comparison—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.
Over the years, AAII has been polling members about broker satisfaction. The discount broker survey asks which on-line discount broker members use, the primary reasons for choosing their broker, and to rate their level of satisfaction with their broker.
A summary of the past five years of results is shown in Table 1, which presents the ratings of the most popular brokers based on member responses since 2004. The percentage of members using one of the top five brokers has grown from just over half last year to 72% this year.
Scottrade continues to be the most popular broker among members. This year, Charles Schwab and TD Ameritrade switched places, with TD Ameritrade taking the number two spot and Charles Schwab the number three. Fidelity and E*Trade remained at numbers four and five again this year.
|Ratings (Top Score = 4)|
Table 1 also provides member ratings for each broker in four areas: overall satisfaction, service reliability, on-line trade price and on-line execution speed. Overall satisfaction with the brokers in the top five this year has generally increased, with the average score for the top brokers climbing from 3.3 to 3.4 this year.
Table 2 shows the primary reasons members pick brokers: commissions, services and convenience. The importance of commissions remains at the top, increasing to almost 50% this year from 36% last year. The importance of service grew this year from 19% last year to 28% this year.
AAII’s On-Line Discount Broker Survey gives you a chance to share your experiences and learn how other members feel about their on-line brokers. We want to hear from you this year! Even if you have filled out the survey in years past, we want members to weigh in each year to gauge how opinions and attitudes change over time. Please take a minute to log onto AAII.com to answer a few questions and share your experiences. The questionnaire can be found under Investor Surveys. Results are posted and continually updated. All responses are anonymous.