| 02 February 2010

Charles Schwab's (SCHW) reign as the Discount King (among the larger kingdoms, that is) is getting harder and harder to hang onto these days. While his subjects are happy with $8.95 equity trades and free trades on some ETFs and mutual funds, the sovereign nation of Fidelity today declared a duel with Schwab and announced a price cut to $7.95. This, just coincidentally, is a buck below Schwab's rates, in case you didn't catch that.

It was les than one month ago when Schwab cut its rates, which we reported here. Not to be left out, the boy king, TD Ameritrade (AMTD), would have its subjects know that its trades are just as cheap. But at $9.99 for equity trades their pricing comparison chart will lose a lot of its impact. (At press time the chart still showed Fidelity at $19.95 to $150 for 10,000-plus share trades.)

E*TRADE (ETFC) (sorry, we can't hang with the metaphors, we tried) is still at a whopping $19.99 for stock trades for less active traders (less than 30 trades per quarter). But let us not forget Scottrade, poor Scottrade. Humming along at seven bucks a trade and not a peep written about them. We're going to start calling them the "Dark Horse" of online investing. It is a term of endearment.

So are we in the midst of an online broker price war, as Theresa Carey at Barron's suggests? At this point it cannot be denied.

But the really interesting bits are in the details and in particular we disagree with the explanation offered by Jason Raznick in her article. As he said to Ms. Carey, "the revenue model at these companies appears to be shifting from commissions to selling order flow to larger brokerage houses and amassing more assets."

While more accounts and more assets are always important, we don't believe brokers are benefiting much from the assets alone in this near-zero interest rate environment. To wit: Fred Tomczyk, president and CEO of AMTD, commented on the changes their firm is making to face a rocky future. "We have taken a number of steps over the last year to mitigate the impact of the near-zero interest rate environment," he said in a recent release.

Schwab's CFO Joe Martinetto, it seems, would agree. "The net interest revenue generated by this growing asset base has been severely impacted by continued declines in the short-term interest rate environment, even as the overnight Fed Funds rate has been at essentially zero since late 2008," he said, commenting on their latest results.

Neither do we think firms will continue to benefit much from those controversial payments for order flows. We recently reported on this when OptionsHouse "adjusted" their pricing -- meaning up for some, down for others. As George Ruhana, the firm's CEO, said recently in an interview, "payment for order flow rates declined significantly this year, which made some high volume trades money losers for us without the change in structure. We had to make our pricing realistic long term with the new market realities."

So whither fees? All over the map, unfortunately; and many of them are still hidden from plain site. Brokers may offer reduced fees or no fees on some mutual fund orders, for example, but this is usually because they're paid a marketing fee by the product provider to sell the funds (which is ultimately passed on to us, the consumer, thank you very little.) We mention this only because it makes the point that there is still fat to cut, which means more wars will be declared. In other words, the changes won't stop here.

The brokers that are well-capitalized and in a position to grow accounts AND offer a wide variety of fee-based options to those accounts will win out in the end. (Did you notice the all caps? ) Schwab recently announced a $480 million public offering to go after more bank accounts, for example. E*TRADE, on the other hand, is still struggling to right its ship.

What we don't know is how these changes will effect the smaller, niche brokerages like tradeMONSTER, OptionsHouse, and even optionsXpress (OXPS). Whether these Lords can round up their serfs and rise up against the Kings of Commission remains to be seen.