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Monday, October 16, 2006

The Era of Free Trading Begins for... (BAC)(ET)(AMTD)

From The Average Joe Investor

Bank of America (NYSE:BAC)??? After hearing a lot about the big kickoff of Equinox Securities subsidiary, who is offering free trading (up to 40 trades/month) to anyone with a $2,500 account, I was surprised when BoA decided to steal a little of that thunder with their announcement. BoA's deal isn't quite as sweet since you get ten fewer trades per month and you need $25,000 in funds with BoA. But, it's BoA.

I thought about this from a few perspectives:

1) As an E*Trade (NYSE:ET) customer, I'm paying $10 per trade in commissions. Though $10 is certainly more costly than free, I doubt I'll switch. Sure part of it is due to good old fashioned laziness, but think I get a lot of value from some of the tools and research that E*Trade offers, and as far as I know, BoA and Zecco are a bit more stripped down. I also am not making a heck of a lot of trades, so the switch really wouldn't buy me all that much. And even for those who are making a lot of trades, timing is everything in high-volume trading and unless BoA or Zecco is planning to role out a tool similar to E*Trade's Power E*Trade, the costs of transaction friction (not getting the stock at exactly the right time/price) are probably greater than the commission difference.

2) As a BoA shareholder, I think this is a pretty slick move by my boys down in NC. This seems like a great way to get current Bank of America customers to move equity accounts over to BoA for easier asset management. Because a) they are primarily looking to capitalize on handling more assets and bring in interest income from them and b) they are currently an also-ran in the retail equity market, this could be a great move to grab a bigger piece of the pie.

3) If I were a shareholder of E*Trade (or any of the other big players in here like TD Ameritrade (Nasdaq:AMTD)) I would be a bit worried. Although there are likely a lot of customers that agree with my sentiments above, there are likely a good many who will love the sound of "free." There is also the potential for BoA, Zecco, or somebody else entirely to offer free trades along with some of the nice extras that E*Trade and Ameritrade have. As of FYE 2005, commissions accounted for something like 1/4 of E*Trade's total revenue with the average trade bringing in nearly $14 in commissions. That's nothing to sneeze at.

At the end of the day, I think E*Trade and Ameritrade have seen the writing on the wall for a while now and have been focusing on drawing more of their revenue from non-commission sources. Additional pressure on commissions could be a short-term pain-point, but I doubt it will be a serious blow to either. So all I have to say is: when are my commissions coming down E*Trade?


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