As promised earlier, I wanted to respond to all the comments on my post, 'how do we do it for $4.95?', in one go if I can. If this doesn't cover your question adequately, feel free to post here again or private-message me, and I'll get back to you personally. 

1. Our cash balance policy.

Edward Hafer called it correctly: our current policy is to pay out 1% on cash balances under $50,000; for those above $50k, we sweep the funds automatically into an FDIC-insured sweep account. Currently sweep accounts pay 4.3% on these cash balances. See our Commissions + Fees page for a full rundown.

We think the policy works for a few reasons. Since most of our clients are active traders, their tendency is to keep relatively little cash uninvested, so they're not usually seeking us out for big cash payouts anyway. We didn't design the TradeKing brokerage account to really work as a checking-account substitute, and so far I haven't heard from customers that this was desired.  In fact, some of our active-trading clients who sometimes run their cash balances up over that $50k mark have specifically requested that we NOT set them up for sweep -- they find all the journaling of their money back and forth bothersome.  I guess the message is that this isn't "interest-earning" money; this is "trading money" in those clients' minds.

That said, we do have some clients with cash balances in the $20k - $30k zone who have requested sweep accounts, and we have accommodated those requests.

I hear your counterpoint coming, though: if so few customers are parking more than $50k at TradeKing, why not pay out a higher rate as a nice-guy maneuver? We've debated that several times here, and honestly, the pro-con list is so tightly matched, we may revisit the policy soon.

My biggest concern is this: if we change the policy, we're courting a new market of checking-enthusiasts that we're not otherwise prepared to serve. If you're coming to TradeKing with lots of cash you plan on NOT investing or trading, you'll naturally want a complete suite of banking features. We offer basics like an ATM card and check-writing, but a world-class online bank would also offer a network of ATMs, online bill pay'¦a suite of banking features that's not currently our focus. 

We've targeted a certain type of client, and we are so far successful at attracting that type of person, affording us the opportunity to give all of our clients great service.  I worry that our service will degrade if we make ourselves attractive to the plain vanilla banking clients. 

If TradeKing is going to succeed as a young company, we have to prioritize and stay rigorously focused on our core constituency: the active, self-directed options and equity trader. Building an online bank is another guy's business and not ours, at least not yet.

That said, I've already admitted to being open in this debate. If you can think of other compelling angles I've missed here, comment on them here or message me. We can keep the conversation going.

2. We do accept payment for order flow.

We accept payment for order flow just as almost every broker on the Street does. (What's more, brokers are required to disclose this information in a quarterly report called Rule 11Ac1-6. It lists specifics of how each broker routes orders of various types and what sort of payment they receive for that order flow routing. Check out our order routing disclosure.) With our low-cost business model and as a young startup, we can't afford to not accept this legal form of payment.

We accept payment for order flow, mainly for option trades, and only when the party executing the order guarantees that our client orders will all receive a price equal to or better than the national best bid or offer at the moment the trade is placed. I couldn't sleep well at night unless I'm getting some of the best executions on Wall Street for our clients, payments or not.

Payment for order flow raises some interesting industry issues. It pretty much went extinct in the equities world after pricing went to pennies a few years ago. It makes a lot of sense, in my view: equities with big floats can and should be trading at the tightest possible price increments. The SEC now has a pilot plan to take options to pennies, which would presumably put a similar crunch on options payment for order flow.

I'll go on record here as I have elsewhere: the SEC or NASD should just be courageous enough to ban payment for order flow entirely, if that is their desire. Taking options to pennies may have the perceived "good effect" of squeezing payment for order flow, but it may also have some other, worse effects.

Payment for order flow and moving options to trading at penny increments should not be inextricably linked, in my view.  Let's carefully consider whether trading options at penny increments makes sense of its own accord:

Think of a big blue-chip stock like IBM. In the equities world, there's plenty of liquidity, it's thickly traded, a spread of a penny works well. Both buyers and sellers are getting good prices, the trades are pumping through with quick matches at competitive prices, everything's flowing.

The options on IBM are a whole different story. It still attracts a lot of investor interest, but now you split up all that liquidity across several strike prices and expiration dates. If you take all those options down to dime or nickel price increments, then to pennies, the net effect could be that more customers get "pennied": they sit there waiting all day for a trade to get done, just a penny away from a match, but the match is never going to organically happen -- the liquidity is spread too thinly.  This scenario is much easier to imagine occurring the less liquid an underlying issue and its options are.

Another downside to pennies in options trading is the crippling data burden. For every series and strike price of IBM options in our example, the exchanges have to save every tick, every time the quote changes.  When the bid on IBM stock moves a couple of pennies, the market centers where IBM trades record the new price and time it occurred, and save that one data point, as required, for years.  That same move of a few pennies in IBM, however, if it causes all the IBM options to move in price as well, causes all the options exchanges to have to save potentially hundreds of new prices, time-stamped, for each such movement.  That's a LOT of data points to save. Exchanges are already crippled with all the options data they keep to meet their regulatory data retention requirements. If you raise the exchanges' data bills by a question mark, how much additional cost has been added to the system to offset whatever savings came into play from losing payment for order flow and the supposedly tighter, more efficient spreads in options trading? If you think that sounds too sympathetic to the poor exchanges, think of this: those costs aren't borne by the exchanges alone; they're passed along to brokers and individual investors -- it's inevitable.

Another important wrinkle: if moving to trading in pennies, and the accompanying data crunch, drives a couple of options exchanges out of business, I don't think that is good for individual investors, either. I believe investors benefit when there is competition for their order flow, and the more entities competing, the better.

3. Economies of scale.

Sidarta Tanu advocated that we try to get bigger, so we can pass our economies of scale down to our customers in the form of lower commissions. I think we're on the same page there, but I do think we need to focus hard on our customer -- that active, self-directed options or stock trading guy or gal -- and try to grow as much as possible within this niche.

To be clear: TradeKing doesn't advocate trading at any particular pace -- each investor should do what is appropriate for them.  We know there is a large set of underserved active trading folks -- and that's who we are most focused on helping right now. When we hit bigger numbers, it's very possible that our scale could translate to better deals for the individual investor.

I wrote a series of posts touching on this subject -- check it out. Lots of our big-boy competitors claim economies of scale as justification for all the merger activity out there, although whether they deliver on this promise is questionable at best, in my view.

I'd like to grow at a steady clip while not abandoning our focus and serving those active options and stock traders as best we possibly can. In fact, I hear from a lot of customers that the "facelessness" of the big guys is a big reason for joining up with us.

I'm so pleased to be hearing back from you this way. This is exactly the sort of direct dialogue we wanted to get cooking by starting this blog -- a kind of dialogue I think you'll find lacking at the big-name brokerages.

Keep your thoughts and opinions coming!  We're building this brokerage to serve you, and your feedback is crucial to keeping us on track.