Skype backer takes on ETrade with free trades

47 Comments

Morten Lund, the guy who was the earliest backers of Skype is at it again. He has financed Zecco, a start-up that will allow consumers to trade stocks for zero commissions, versus $10 to $20 that many online brokers charge today. Other investors in the company include former Dutch Coca Cola CEO Pier Baarsma and Soren Kenner former chairman of McCann Erickson MRM Europe

CEO Jeroen Veth, a 37 year old entrepreneur and former Merrill Lynch Vice President is heading up the company and contends that most of the old school online brokers spend too heavily on marketing and thus have to charge higher prices. Lund and crew believe that the actual trade costs about $2 and if they can lower the cost of marketing to near zero, they can offer zero commission trading. They will make money with what else – advertising.

Our model is different. We run a lean operation, use the latest technology and rely entirely on word of mouth, guerilla marketing, viral campaigns and public relations to get the message out. As a result we can look at the $2 per trade as the cost of doing business – and still turn a tidy profit

Zecco, in company’s own words is at “the intersection where online brokerage meets Yahoo Finance and Myspace,” and offers tools such as free blogging, forums etc. The big question is can they make it happen? My gut says that there will be some who will be attracted to this service because of its free nature.

Others will show up at the service because of the forums, and the community, and many are already looking for options to Yahoo Forums. In the long run this could cause old school companies to look at their own pricing structures hard and lower their prices. But can Zecco be the next ETrade, well not sure about that. What do you think?

via Net

47 Comments

Jimmy Johns

I am not sure if this model will work. How in the world can they assure the protection from Hackers if they have absolutely no revenue.

Soren Kenner

Good discussion going there. I’m part of the Zecco team and just wanted to clarify how the business model works. Think of it like this. If ETrade ends up spending $6 per transaction in sales and marketing costs and we spend nothing on marketing but instead give away a $2 trade and rely on word of mouth to get the word out … than we are doing three times better than Etrade on customer-aquisition costs pr. trade. On top of that we will also be generating revenue on margin trading and interests on accounts. So I believe the business model is rather solid … and we’re certainly looking forward to put it to the test. Come and join us all for our online launch party on Oct 9th.

Zach

Becoming a household name is imperative in order to capture the market of personal investors. Expensive merketing is thus unavoidable in order to compete with the huge web investment portals.

Sabin Speiser

Two comments to this:
1. This is not about spam. We were trying out a new feature on Google that was not fully documented. Had no intention of making anyone join a group against their wishes. Just evaluating online tools. So, we feel especially bad about this because everyone who got the Google groups communication is someone whose blog we read and like.

  1. I would like to point to the fact that we actually offer to split advertising revenue with bloggers that use our site to host their blogs — and believe we will be able to generate many more pageviews for our bloggers than most will be able to on their own.

See you at Zecco. For your free trades, inspiring blog posts, or just to browse around.

Sabin Speiser

Apparently they are spamming bloggers too: http://www.wealthjunkie.com/2006/09/23/zecco-spamming-bloggers/

Two comments to this:
1. We were trying out a new feature on google that was not fully documented. Had no intention of making anyone join a group against their wishes. Just evaluating online tools. This is not spam. So, we feel especially bad about this because everyone who got the google groups communication is someone whose blog we read and like.

  1. I would like to point to the fact that we actually offer to split advertising revenue with bloggers that use our site to host their blogs — and believe we will be able to generate many more pageviews for our bloggers than most will be able to on their own.
Vacman

Go to Zecco.com AND SEE WHO IS ADVERTIZING!!!!! SOGOINVEST is advertizing??????? Why would Sogoinvest be on their web-site advertizing???????????? This isn’t making sense!!!!!!!Why would you let SOGOinvest advertize on Zecco.com(WHEN ZECCO trade cost is going to BE $0.00)???? YOU MAY WANT TO THINK ABOUT THIS!!!!!!Vacman

mark

Re: yahoo’s message boards, Yahoo recently made major changes to their message boards, causing an enormous backlash from users. Management at Yahoo completely failed to understand that stock message board users don’t want messages organized by topics (comments are too dynamic, too rapid fire for topics), they want message organized by chronological order with most recent messages at the top. This new startup, if they’re smart, will study how Yahoo used to do their boards 6 months ago. If they can attract a fraction of Yahoo’s traffic, they’ll build a nice business, with or without the zero commission trading.

Theresa

This isn’t a new idea. It’s been done. One of the other pieces of revenue for E*Trade, and quite a few other online brokers, is payment for order flow.

When you enter a stock or option order, some brokers employ technology that seeks out the best price. Say you entered an order when the markiet is at $10/share. A broker who offers price improvement might find you a trade at $9.98. If you were trading 1000 shares, you just saved $20.

But other brokers route their orders to market makers who PAY THEM for your order. Why? Because they are either selling from their own inventory, or bumping the price a smidgen and taking it from you. So your order when the market is at $10 might get executed at $10.05.

Now your “free” order just cost you $50.

I will cover this topic in more depthy in my Barron’s column (“The Electronic Investor”) in the not-too-distant future.

John

Why not? Remember the future is not in content but rather the conversations and community formed around it! I’m thinking this will work!

Zecco Scam

One other suggestion would be to short this dog as soon as its shares hit the market.

Zecco Design Team

Check out the “Zecco Preview” link on their home page. Would you trust your money to a company that spells losers: “loosers”?

Congrats to Mike B. For finding this typo. We just fixed it. Any more valuable suggestions? Please post them in our Feedback Forum on Zecco.

charles

Zecco will make money from cash balances, options (cheapest in the market I heard),other financial product not only advertisement. 49% of ETrade’s income comes from margin spreads and interest income…check Etrade’s figures. They could offer 0$ commissions costs trades easily if they wouldn’t have over 2000 employees,over 200 million marketing costs and legacy systems.
I think Zecco did their homework well. The fact that the Skype invesors seem to be behind Zecco is telling. Most of the time those kind of investors are smart enough not to invest in a plan driven by just ad revenues

Chetan

Mike B:

They are mere “Brokers” where is the question about safety of my or your money in their hands. Unless, you opt for their advisory/… services. No Thanks!

Jay

Actually, this has already been tried. Ameritrade had a little-known division called Freetrade. No marketing, no advertising, just word of mouth. they couldn’t make it work. They’re now $5 per trade. True, they weren’t doing the whole social networking thing, but I think it will be tough. However, at least these will be people with money, so theoretically a better crowd to market to than, say, myspace. Even though google and yahoo are going after myspace and facebook deals, it still remains to be seen if that will really pay off in the long run. We shouldn’t forget that Yahoo paid $5B for broadcast.com and then later basically shut it down. So these guys are not beyond making foolish investments. It remains to be seen if thses are real businesses or if we’re again just seeing some people at the top cash out of what is essentially a voluntary pyramid scheme, but won’t be recognized as such until after the fact.

Dave McClure

definitely… someone should do this.

there’s very little middleman value in online brokerage, and the costs should be driven close to zero.

why shouldn’t companies be doing this service direct themselves? it can be an outsourced function, but no reason they shouldn’t let their shareholders initiate DRIPS right from the start?

hope they’re successful.

  • dmc
John Wilson

This story may initially send a shiver through the retail brokerage commission which is already operating in a commodity space, but may also prompt some scepticism about what’s going on.

However, the securities trading business is one that I’ve spent 17 years involved in and there’s always an angle. So how might this work in practice
– they could be charging market makers for their flow. If the volume of shares you trade is sufficiently sizeable, market makers have been known to pay for flow because of the information content value, not to mention the ability to satisfy their inventory requirements
– they could internalise some of the flow provided that there are sufficient buyers and sellers in the same stock
– they could be marking the price up or down, in the same way as commission free foreign currency outlets operate – wholesale FX operates a zero or near zero spreads, so when you see a spread on the board that you could drive a bus through you’ll know how they are getting rich
– they can be making good interest revenues from margin and client deposits

Sometimes, when you see a deal too good to be true, it is.

Mike B

Check out the “Zecco Preview” link on their home page. Would you trust your money to a company that spells losers: “loosers”?

Chetan

They better have a big cluster ready if they don’t want to disappoint potential customers. Glad disruptive thinkers are making a difference. Best!

David

Zero commission will be common for both retail and Institutional equity trading in the next years. Trading will be like free envelopes at the post office. Commission income for a large number of second tier banks and old style brokers will go down dramatically and a large number will have to close their equity trading and research operations . Old style investment banking is dead, technology rulezzz!!

Sabin Speiser

There are three legs to the revenue model. If you look at Etrade’s 10-K, you can see that of their $1.6 billion in revenue only $600 million came from commission revenue. 49% of their income comes from margin spreads and interest income. The other leg is higher margin products that do cost.

The advertising is just gravy. However, advertising revenue may be more sure than comissions and don’t lock with the market.

Gopi

Its all about perception. As the first comment most of the mainstream investors will be very sceptical to park their nestegg with a “internet brokerage” with unproven biz model.

This may attract the smalltime daytraders but they will always be a cost center to Zecco as financial advertisers value them less (its tough to sell a mutual fund to a daytrader vs a regular joe saving for retirement) and also daytraders generate much more trades costing Zecco more.

Kris Tuttle

They need to be able to deliver top notch execution which as far as I know is not easy. E*TRADE spent over $400M to develop the initial system and I expect still spends a significant amount to keep it up. Many of their tools are not of use except to higher end traders so there is probably a niche for a company like this. However they need to be prepared to offer a high quality system given the nature of the application.

As a pretty active trader with E*Trade I expect to pay about 1% of my asset value per year in commissions. In a lower-return world this would make a difference.

It may also be worth noting that with E*TRADE Visa which I use now my trades are commission free.]

Soren Kenner

Hi

Just a quick comment on the financing and ability to follow on through:

Marcel Boekhoorn — Dutch billionaire investor who recently sold Telforth to KNP at a $1,4 profit — has helped finance the venture and will continue doing so … so I have to say we’re in pretty good shape vis-a-vis ability to follow through in the face of competitive onslaught.

Geir

There is obviously a huge demand for zero commission trading. It gives trading based on technical analysis a whole new dimension – which is why this won’t fly.

You have to be sceptical of any business model that has costs increasing so much in proportion with with new users.

The business model reminds me of the Web 1.0 bubble companies that wanted to pay people to watch ads. When times get tough in advertising, Google can reduce costs. Not so for Zecco.

Netanel Jacobsson

I think that Zecco answers two needs:
1. Zero commission trading
2. A nich social community for traders, finance guys and consumers interested in trading where they can share tips, get advice from each other and discuss the latest finance rumours.

Anonymous

great idea. house your nest egg with a start-up brokerage with unproven biz model. scandal looking to happen

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