It Turns Out Zecco's Free Trading Model Isn't Such A Good Idea

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We outlined three points in 2006 on why Zecco’s free trading model raised some red flags. Unsurprisingly, the discount online brokerage firm has been forced to change its pricing structure due to the economic crisis.

Over the years, the zero commission brokerage service increased the minimum asset balance to $2,500 and decreased free trades from 40 to 10. Now the company is putting further restrictions on trades. In a letter to customers, CEO Jeroen Veth says that as of March 1 customers will be required to have $25,000 in assets to qualify for free trades. The full letter is below.

Why? Zecco is no longer making money thanks to the now low interest rates on customers accounts. And revenue from discounted commissions are amounting to very little.

We saw the writing on the wall for the trouble this company could face in an unstable market. Although Zecco was able to secure $25 million in funding late last year, the company has been hit hard by a decline in trading due to the economic downturn. In an effort to boost trading, Zecco is allowing customers who make at least 25 total trades per month to also qualify for 10 free trades. In early January, Goldman Sachs forecasted a 28 percent decline in daily average revenue for discount brokers.

Even the premier brokerages like Charles Schwab are not immune to the current economic crisis so its of no surprise that Zecco, whose pricing structure raised some red flags in 2006, is being forced readjust its pricing model. Last week, Charles Schwab warned that revenues could drop as much as 20 percent this year and said it will cut between 500 and 600 jobs, or 5 percent of its staff in the current quarter due to low interest rates and a decrease in trading.

Here’s the entire version of the letter Veth sent out:

Dear Zecco Trading client,

I’m writing to tell you that as of March 1st, 2009, we’re increasing
the minimum level of assets needed to earn 10 free trades per month to
$25,000. We’re also adding a new way to get free trades: customers who
make at least 25 total trades per month will also qualify for 10 free
stock trades per month.

Additionally, as of March 1st, 2009, you’ll be able to earn $75 for
each friend referred to Zecco Trading through our Zecco Friends
program. You can use that cash to offset trade commissions or make new
investments.

Why was this necessary now? Anyone who’s read a newspaper lately knows
that the US and world economies have been hit hard over the past 4
months. As a result, some of the largest corporations in the world
have had to cut costs and adjust to new business realities. With
reduced retail trading volumes and lower interest rates, we at Zecco
Trading simply could no longer provide free trades to as many people
as we would like.

Many customers will not be affected by this change. For those of you
who are impacted, I want you to know that I understand this is
disappointing news. Since our founding, our goal has always been to
provide a great value to online investors, and we’ve always made free
stock trading part of that. And while we continue to provide some of
the lowest trade commissions of all leading online brokerages at $4.50
each, we understand that nobody likes to pay for something that was
previously free.

I’d like to emphasize that we are continuing to invest in our customer
service and trading platform. You may have already noticed the
improvements within our customer service team. We’ll also be upgrading
to an entirely new trading platform later in 2009. This new platform
will improve reliability as well as introduce advanced order types,
enhanced options trading capabilities, online bond trading, better
account management, single-step login, and a faster website.

So how can you qualify for free stock trades? There are two simple
ways to do it:
1. Keep $25,000 in net assets in your account. This doesn’t have to be
cash — it can be stocks, ETFs, mutual funds, options, or other
assets.

OR

2. Make 25 total trades in a calendar month. These can be stock, ETF,
or options trades. And yes, free trades count.*

For more qualification details, visit:

http://www.zecco.com/trading/newpricing.aspx

As mentioned above, as of March 1st, 2009 you’ll also be able to earn
$75 for each friend referred to Zecco Trading. You must refer your
friend through our Zecco Friends Program, and your friend must open
and fund their Zecco Trading account with at least $500. See program
details here.

Thank you for your loyalty to Zecco Trading. We intend to continue
earning your business as the best value for online investors.

Jeroen Veth

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