New Online Broker Offers Free Stock Trades
BrokerageAmerica Inc., the newest player in online investing, is offering commission-free stock trades in a bid to compete with established brokers.
By entering the free stock trading business, New York-based BrokerageAmerica is going where several others have failed. But unlike its predecessors, the company is a “market maker” that buys and sells shares for investors and profits from the spread between bidding and asking prices.
Wall Street analysts are skeptical, however. They noted a decline in profits of established market-making firms and said it will be difficult for BrokerageAmerica to penetrate an already saturated industry that is mired in a widespread trading slump.
Undeterred, BrokerageAmerica began operations last month and is spending $7 million on a national advertising campaign focused on eliminating the broker from the investment process.
“We eliminate the middleman,” said Drew Sycoff, BrokerageAmerica’s chief executive. “This is the next evolution in online trading.”
Whereas other online brokers charge customers a commission and then route share orders to professional market-making firms for processing, BrokerageAmerica will try to keep customer order flow in-house. The company currently “makes markets” in about 600 stocks, and plans to boost that number to several thousand over the next year, Sycoff said.
But spreads on Nasdaq have narrowed by as much as 71% on the most actively traded stocks with the recent advent of decimalization, often leaving market makers with penny profits on trades.
“I just don’t get it,” Jaime Punishill, who follows online brokers at Forrester Research Inc., said of BrokerageAmerica. “I don’t see how they’re going to succeed when everybody else is struggling.”
In addition to offering investors free stock trades, BrokerageAmerica gives customers a rebate of one-tenth of a penny per share on each order. That means a $1 rebate for every 1,000 shares bought or sold.
So how will the firm make money? “The same way market makers have made their money since their existence, by either going long and/or short a position and by taking risk intraday, overnight, etc.,” Sycoff said.
That means BrokerageAmerica’s proprietary stock trading team will play the stock market for its own account, helped by its insight into customer trading activity.
