| 04 November 2009

When we heard that Michael Raneri was named the new CEO of Zecco Holdings we decide this was a good time to have a chat with the pending chief and find out what Zecco has been up to lately.

We have to admit, though the company is but a hop and a skip away from us on the San Francisco Peninsula, we didn’t know much about the company other than the fact that they had a consistent free trade offer and a robust investing community. (Yes, we noticed the “Zecco Zirens,” too, but our official stance on them is “no comment.”)

Let’s face it, online brokers that cater to active individual investors are finding it hard to differentiate. Competing on price has a fine heritage and Charles Schwab Corp (SCHW) (Raneri’s predecessor organization) lead the way in the 1970s and 80s.

But how low can you go? Not much lower than zero, and Zecco’s current offer is 10 free trades a month with a minimum $25,000 balance and a total of 25 trades a month (or $4.50 otherwise). In other words, not zero, but close.

Raneri tended to downplay commissions as the lead message. “We prefer to think of ourselves as the best value in the marketplace,” he said. When you consider price, service and the product and experience altogether, Raneri feels they offer the best combination.

He emphasized the steps they’ve taken to improve customer service, for example. And said they continued to invest in those efforts.

So in a world of little differentiation, what is Zecco’s play? “We have a very healthy social community,” said Raneri. Traders don’t have to open an account to join the community and Zecco currently boasts more than 300,000 members, well more than twice as many account holders.

I wondered whether most of these participants were just lurkers. How active can the community be? “The community tends to mirror the blogosophere,” he admitted. “Some are very active while 90% are just lurking. But what’s important is we can mine the community for data.”

And there Raneri, the current and soon-to-be former Chief Information Officer of the company, hit on a very interesting angle. What interested me is just how far Zecco had taken the concept of community.

Aside from Scottrade no other broker has dabbled in the community space, and Scottrade is still a relatively small effort. Zecco may have an opportunity to play in the same waters as kaChing, Covestor and even sites like Currensee. And Ranieri agreed. The opportunity to tap into the wisdom of the crowds exists, and in fact Raneri used that term several times in our conversation.

The problem is that the markets are not, say, a jar of jelly beans. Crowds can often be wise when the "correct" answer exists (think "Who Wants to be a Millionaire!"). However, a stock's price already reflects the best estimates of the company's future value by a very large crowd of investors. Nevertheless, there is activity and there is data. How much data? Well, so far 50,000 people have opted to share their actual trades with anyone willing to listen. These are not virtual portfolios but a window into the actual, executed trades a trader is making. Traders also comment on current market conditions and why they placed the trade. Zecco offers a connection with fellow investors that has heretofore been segregated from the actual trading experience.

Participants in the community can get quotes and charts, news and research as you would on any other site; but now view a community dashboard where they can see the top traded stocks among the community and get a sense for how other like-minded traders are investing.

We checked Schwab, E*TRADE Financial (ETFC), TD Ameritrade (AMTD), optionsXpress (OXPS), tradeMONSTER and OptionsHouse and while they all offered “trading ideas” an tools to help you find trades, those ideas were institutional, not individual.

“What’s interesting about financial services,” Raneri told us, “is that people aren’t always comfortable sharing what they know with people they know. But they’re much more open to questions and providing insights anonymously.”

Zecco has learned to emulate what works. Community participants can “friend” other members. They can chat and message with those friends. They can build investing groups, publish their own blogs, and search for people who trade like they do. Users can see top performers, most-traded stocks in the community.

kaChing has developed what it thinks is a much better approach to grading and ranking its top investors, which it calls “Geniuses.” The company takes into account historical returns, risk and ability to stick to a stated strategy. As for Zecco, investors can either self-select an approach or tap into an algorithm that allows them to see others who have, say, just executed a similar transaction. (They don’t share dollars traded, just the allocation in the portfolio.)

We asked Ranerio how he felt about the new breed of services like kaChing and Covestor that allow investors to automatically follow and even execute the trades of other investors. “I think people need to step gingerly there,” he said. He then offered that it might be more interesting to allow users to invest in a number of portfolios and blend their approaches. The process, in other words, may be more about learning than automatically executing.

Which then led us to a discussion about investor education. Raneri admitted they could do better job on education but that they were working on ways to improve it. But, if done, right, following the trades of successful investors can be an educational experience. Most interesting to us, for example, is that the community system can digest and translate complex options trades. This is something kaChing has yet to enable. What better way to learn how to execute a calendar spread than to see it in action and hear from the trader why they chose to do it and what they expect to happen?

Raneri will officially assume the position January 1st and current CEO Jeroen Veth intends to assume a position on the Zecco Supervisory Board.