Trader’s Narrative

Today, most financial companies are an endangered species. But other brokers and investment banks may be struggling and getting government bailout money to spend on bonuses, Interactive Brokers (IBKR) goes from strength to strength.

They recently reported earnings for 2008 and for the first time they broke the billion dollar mark for income (before taxes and minority interests). When you consider this was done on revenues of only $1.85 billion, you get an idea of how tight a ship they run.

I’ve mentioned before that they are one of my favorite brokers and arguably the best broker out there for the non-proprietary trader. As a customer, it’s good to know that your broker is on solid financial footing - one less thing to worry about.

If you trade with them you soon get to love their SMART routing which gets you better prices at surprising frequency. Based on independent analysis by the Transaction Auditing Group, IB’s SMART routing beats the competition. You can get the full details here.

As well, they are continuing to roll out new products and expand their already impressive market reach:

• Korean Kospi 200 Futures and Index Options (for US resident customers) soon
• National Stock Exchange of India (NSE) equity - initially to residents of India but eventually to others
• …to be then followed by NSE index futures trading
• addition of American Century no-load mutual funds

You could argue that IB is becoming a quasi-prime broker. They are a one stop shop for equities, derivatives (options, as well as futures) in more than a dozen international stock markets. And they have forex to boot. Add to that mutual funds marketplace they implemented in recent years and you’ve got a top-notch brokerage firm.

But that doesn’t mean they are the perfect fit for you. I think they are definitely worth a look if you are an active trader or have a large portfolio. But you should do your own due diligence to find a broker that you’re happy with.

Here’s a chart of Interactive Broker’s (IBKR) stock price since their IPO:

As you can see from the chart, fundamentals count… but not really

Zecco is a new brokerage firm started in late 2006 that offers zero commission, online trading.

Sounds too good to be true! So how do they make money? Through advertising!

For those who were around during the bubble years, this is nothing new. In fact, often, I think that the whole “web 2.0″ is nothing more than the web 1.0 with a new paint job. Take the AllAdvantage zombie which is now called Agloco. But anyway, believe it or not, during the bubble years, there were firms who offered free brokage services.

As you’ve probably guessed by now, they’ve all long kicked the can. Which says a lot about this business model. Lets see, there was FreeTradez.com which didn’t even get off the ground because they failed to comply with NASD request of financial statements.

There were others who offered free market orders but charged a small fee for limit orders. In other words, they sold order flow. A big no-no today but quite ordinary back then. After all did you really care if your broker cheated you out of $0.50 a share when the intraday ATR was $25 or more?

Among these sellers of order flow was FinancialCafe.com which later on merged with another free broker, BrokerageAmerica.com in a futile attempt to forestall its demise.

So feverish was this trend that even well entrenched brokers got nervous that they were missing out on the new new thing. Ameritrade jumped in with a short lived division called FreeTrade.com

They offered free market orders but charged $5 for limit orders (again, selling order flow). Later they changed their commission rates a few times. At one point they looked pretty similar to today’s Zecco: they offered 20 free trades a month and then a laddered rate for transactions after that.

Of course, Zecco has the luxury of really deep pockets since it is partially owned by Morten Lund one of the billionaire entrepreneurs behind Skype. So I don’t think it is going away any time soon.

Although they are using technology to reduce costs, there is only so much you can do. One cost you can’t reduce much without damaging your business is customer service. This by the way has been the Achilles heel of Interactive Brokers for many years (although they have improved remarkably in recent times).

When I started trading I paid $60+ round trip (at a discount broker!) and being a total novice, I only realized after several trades that with my small portfolio, any potential profit would be handed over to my broker. So I understand people’s need to minimize trading costs. But I really doubt Zecco is the way to go about doing that.

The other consideration is that Zecco’s “free trades” is not without limits: they are capped at 10 a day, 40 a month and after that are $3.50 each. But most Zecco accounts are smaller than $25,000 and therefore, Pattern Day Trader rules apply to them.

If you’re using Zecco to trade (not invest) you will be frustrated with the limitations that PDT regulations impose. And may even lose money if PDT rules stop you from trading. If you have $2000 here’s how you can circumvent them, get 4 times intraday margin and trade all you like!

As Mark Twain quipped, “History doesn’t repeat. It rhymes.”