I promised this post earlier, and I think it's an important topic to get back to.  Maybe you're fearful to try a broker executing for a cost as low as $4.95.  Maybe you think your execution will suffer, or that only a string of hidden catches can make a price that much lower viable.

I want to clear the air, because we have a strong, very straightforward story that I'm happy to explain to anyone. Send me your comments and questions, too.


1. Cut your profit margins.

I don't need to have 60% pre-tax profit margin in this increasingly commoditized business, the way some of our competitors run.  That's just piggish, in my opinion.  A really healthy business should strive for 30% pre-tax profits; any investor should be happy with that.

Of course, I'm not running a charity.  We all have families to raise, too, so it's fair for us to make some money.  But a 30% profit margin makes sense to everyone:  it's good for investors and fair to take from the customers.  We can then give those excess profits back to customers with a much fairer deal.


2. Who pays for bringing in new customers? All the old ones.

If you see your broker's commercials on prime time television frequently, just think of this:  you're paying for them. You're fueling the account acquisition engine, not to service you and give you a great deal, but to acquire the next million customers behind you.  But they're choosing to charge you more to feed their profit margins and their marketing.

We haven't run any television commercials yet, and I wouldn't rule it out for us.  But we try to spend the money we earn from existing customers prudently, in a way they'd respect themselves as businesspeople.


3. Our technology is brand-new and efficient.

Any time you're the newest player in a space, you're working with the freshest technology and not battling or retro-fitting a host of legacy systems.  We reap all kinds of operational savings and efficiencies from that fact alone.


4. We run, we don't walk.

We just work harder and faster, because we have to prove ourselves and make do with fewer resources who are more impassioned and dedicated.  We've got more energy to burn here than whatever's "motivating" people who are sitting within a 1000-person call center.  I know, because I've sat at both kinds of places. This is just better.  

I want to take this a step further, though.  If you have questions or doubts about whether $4.95 can really be a square deal, comment on this post and let's get talking.  I'd love to answer your questions directly, because I think we have a great story to tell.

why do brokers think that the sweep account doesn't matter? 4.95 trades are great and all. but consider the expense of holding 500k in cash at tradeking is about 20k per year. i do about 100 trades per year, that works out to 204.95 per trade. i dumped etrade as quickly as i could over this. and i don't think this situation is uncommon for someone whose strategy mostly involves writing short term nekkid nekkid calls and puts.

$4.95... but do I hear $3.95? $2.95?

- Steven Burda -
e-mail: steven.burda.mba @gmail.com
http://www.linkedin.com/in/burda
(to connect to my professional network)

Do you collect for order flow routing?

Don,

With the talent (people) and the great products (fee structure, service etc) that you have, I have no doubt that your team/Tradeking will be very successful. And now here's my 2 cents.

First, which is probably minor and can be fixed soon is: some sections of the website is slow (mainly the community and help section)

Secondly, I really think you need to exploit the fact that you guys do have the lowest all inclusive trading comission cost. Run some ads, TV ads if you can afford it (FYI, none of my friends know Tradeking until I tell them and I now recommend Tradeking instead of scottrade to all my friends.). I know it's great to have principle to keep the cost low for existing customer, but IMO if you have larger customer base (assuming profitable customer) then your cost per customer will go down which will actually benefit all customers including existing customer. It's basic rule of economic of scale. However, this is especially true and even more crucial if you aren't profitable yet, but as I read your post I take it as you are already profitable (30% pre-tax margin) which is good and should be able to spend more on advertising. Basically what I'm trying to say is, try to fill your glass first and then fill/help others with the overflow. It will be more useful, fulfilling and sustainable

Thirdly, there are many (both tangible and intangible) cost involved in switching broker (often just saving a buck or two is not enough reason. not saying that I wouldn't want to save a buck or two). $4.95 is trully great but it's just a matter of time before others are matching your offer as a defensive measure (so you need to act fast and use your low rate to the max benefit). In fact, I'm already getting the same fees from my broker now (I don't even have to ask for it). Fortunately, time keeps moving on, meaning, each day there will always be new/young investors trying to invest the first time and want the cheapest comission brokerage (and they might choose you over Scottrade)

Fourth, you need to differentiate yourself (in addition to be one of the most cost efficient), and I think you might be aiming for frequent traders as your audience, which is a good start. keep innovating in this differentiating yourself and you will be good to go (success)

Fifth, when you are ready, add products/services/perks for high net worth accounts to attract the big guys (such as assigning account executive to the account, 24 hr/longer customer serivce, lower fees, free ach transfers etc) . These rich people often bring more business later on (word of mouth, promoting your company to their colelagues and relatives)

Lastly, 2 most important things, security and privacy. insurance or FDIC for accounts and make sure customer personal information are safe. I read your help section and I believe you are addressing this area really well ($25M insurance per account and the privacy policy). Never compromise these 2 things.

Like you said, that you guys have a great story to tell. Make sure you achieve that.
Hope this helps and keep up the good work Tradeking team!

Sidarta

I agree with the comment of the website being slow. While I have a TradeKing blog, I still have yet to trade due to the slowness.

The main reason I signed up the TradeKing is for the free quotes.. However it seems that it costs $24/mo or I have to do 30 trades per mo.

I guess I/we could sit here all day compairing TradeKing to other online brokers, but nothing would ever get accomplished. While I'm not a millionare and new to the stockmarket, cutting fees anywhere I can at this point is my focus.

If realtime streaming quotes would be less expensive or free, I would be a dedicated customer.

I think TradeKing is still in its infancy and we will hopefully see many improvments in the near future.

it says they pay 1% on cash balances and for cash balances greater than 50000 they automatically sweep into an fdic insured money market -
why not sweep all cash balances this looks like one way they can charge 4.95 for trades

I think this price structure is excellent. I do SINCERELY hope TRADEKING expand to oversea to offer the best value for international investors.

Of course, this will make Etrade and others far behind the reality.

Thanks for your feedback, everyone. I have answers to all your questions, but due to regulatory constraints I have to submit all comments for compliance approval, which typically takes 10 business days.

That's not as quick as I'd like, but I have to follow the rules. Stay tuned for more info soon...

My account with you qualifies for streaming quotes. However, the ''Gains & Losses'' section does NOT reflect the current information and is delayed by at least 30 minutes. When will this be corrected ???

I wanted to respond to all the comments on this post 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.

Be Good,
Don Montanaro
TradeKing CEO

Hi,

I signed up with tradeking because i like to no hassle fees.

Customer service is supperb (and i've contacted them a lot).

Education materials are superb as well.

My only wish so far is for free realtime 'streaming' quotes (google/ym does this, why cant "my broker"?) and also for realtime update of data found under Accounts sections (a refresh on the database every hour shouldnt be a problem in terms of costs and load).

I'm constantly noticing TradeKing ads online at various sites.  I don't think television ads would bring in a dramatically larger portion of investors/traders.  Maybe I'm marketing-clueless, but generally, those who are comfortable using an online broker will see the online ads, ....no?

Thanks for the comments, folks. EnglishTeach, I agree with you (thus far) that online advertising seems to be doing the trick in a fairly cost-effective way for us. Like I've said before, we don't rule TV out for the future, but for now we're happy with the response from our existing ad channels.

Rauchcory, glad you're a TK fan, and Peaceman, I'm sorry to hear we're not your favorite. It's true that we don't offer every resource  that E*TRADE has, and our policies may not favor every kind of trade where responsible risk management requires deeper pockets than ours. (To your point about payouts on cash balances, check out my lengthy comment above from 10/12/06 for an explanation of our policy.)

At the same time, many clients are happy to trade the facelessness and nickel-and-diming commission structure of the "big-boy" brokerages for a more personalized experience with TK. (How easy is  
it to get Donald Layton, E*TRADE's CEO, to respond personally to your feedback?) If E*TRADE's meeting your needs, I'm glad to hear it - and I'm sorry we weren't able to serve your specific needs.

I'd pass both your critiques on to our development and product teams, too - your feedback is really invaluable as we prioritize improvements to our site.

Be Good,
Don

As a student I recommend TK as well. I've only had problems with CS giving wrong information once or twice, and it was clarified and you guys apologized for it after I brought it up. The overall vibe from TK's website is a simple, intuitive, low-cost broker. As students and for the most part, investors/traders with < 2-3 years trading, an online-broker like this caters really well to "newbies." I've never had a problem getting a newcomer to the investing world to sign up with TK, but I've had trouble with those who are already with a different broker. The main reason they give is that they don't feel that it's worth the time and hassle to switch brokers over the drop in commission prices as they don't trade that often. There's not much else you can do about that, but it just goes to show that getting the first-timer customers is crucial to long-term customer loyalty. :)

Glad to hear your experience has been good with us, locogmac - and even better to hear that you've recommended us to friends! (Don't forget to avail yourself of our Refer-a-Friend program; check out the details under our Services menu. You can earn $50 for every friend you refer, once your friend has opened an account and placed his or her first trade with us.)

It's true that transferring brokerage accounts can be a hassle and, for not-so-active traders, it might simply be more convenient to stay put. You're absolutely right when you observed that first-time brokerage clients are an underserved category - many of our competitors have set up complicated pricing structures designed to reward the richer, older clients and penalize what they consider the small-fry accounts. We have a different view here at TK: lots of those smaller accounts grow larger over time, and we'd love to grow along with our clients along the way. So we hope to keep serving you for a good long while!

I trade long and short term options and find your service very good.  I have found that your router many times gives me better options fills than my other broker.   Your trade desk is also alot more friendly than my other broker.  Kudos to your tech team.  I also love the Options Guy Blog and make it a steady read.  From all that I can see you have a very good business model and are carefully thinking about costs have on clients.

Glad to hear you're pleased, Pauly B! And definitely let us know if you ever have issues or want to share ideas for improving our services. We're always eager to hear from you guys.