Wall Street, meet MySpace

Wall Street, meet MySpace

BROKER HOPES TO CREATE SOCIAL NETWORK AROUND STOCK TRADING

By Mark Schwanhausser,  Mercury News


Article Launched: 07/10/2007 02:03:55 AM PDT

Three decades after San
Francisco-based Charles Schwab led an investor revolt against
mainstream stock brokerages, an Internet start-up a few miles to the
south is redefining the meaning of a discount brokerage.

zecco.jpg
Zecco

The Burlingame online brokerage’s stock trades are free – hence the
name Zecco, an amalgam of letters derived from "zero commission costs."

But giving away free trades – which Goliaths Bank America and Wells
Fargo soon matched – isn’t what poses the biggest long-term threat to
the established players on Wall Street, analysts say. Some predict it’s
just a matter of time before free commissions are widespread.

In an attempt to capitalize on the younger generation’s comfort with
online social networks, Zecco and a low-commission competitor called
TradeKing are fostering virtual "communities" where investors can trade
stock tips, boast about their trading prowess and conduct their trades
in public view for everyone to analyze.

As Zecco’s CEO Jeroen Veth puts it, "It’s Zecco meets MySpace."

The Internet has reshaped the brokerage industry by making it less
expensive to execute trades and adminis ter accounts. But some analysts
think online social networks like Zecco’s could empower do-it-yourself
investors and fundamentally disrupt Wall Street’s broker-driven way of
life.

About half of investors today are what market research firm Forrester
Research calls "validators." These investors do their own research but
want to bounce

their conclusions off an expert rather than do it solo or delegate the decision-making to a stockbroker or financial adviser.

"That expert could be a broker, but it could be a guy in the Zecco
community who is just kicking butt, whose own trading activity has been
verifiably successful," said Bill Doyle, vice president of Forrester
Research in Cambridge, Mass. "I think it can change where people turn
for advice."


Jeroen Veth, chief executive of Zecco, works in his office… (Pauline Lubens / Mercury News)

For some, upstarts like Zecco will revive memories of the dot-com boom,
when pajama-clad day-traders logged on to buy and sell stocks via their
home computers. Investors became regulars at investment sites like
Motley Fool and gleaned tips from countless message boards, sometimes
falling victim to "pump-and-dump" scammers who touted stocks and then
sold them before the hype faded.

Zecco hopes its site will become a trusted magnet for such
do-it-yourselfers. Its site features Motley Fool’s "CAPS" stock ratings
compiled from investor opinions, and investors can share tips and
tactics on numerous blogs and forums.

The big draw, though, is likely to revolve around members who post
profiles describing their investment and trading styles, investment
experience and stocks they love or hate. Zecco also is beta-testing
ZeccoShare, an opt-in feature that will allow others to peek at their
portfolio and track their trades. Investors also can set up alerts if
they want to track or mimic another investor’s trades.

"It’s really a plan for the next generation of investors," Veth said.

It’s also a sign that there’s room for specialty brokers, because
investing is no longer just a game of getting big to attain economies
of scale. For example, Zecco’s customers tend to be about age 35.
Though they lack the assets of baby boomers, Veth hopes they’ll grow up
financially with Zecco. Meanwhile, Florida-based TradeKing is aiming
for fortysomething do-it-yourselfers who want to employ more
complicated options-trading strategies.

"You don’t want all the customers," said TradeKing CEO Don Montanaro,
whose career started in the Palo Alto office of former discount broker
Quick & Reilly. "You just want the smart, profitable ones."

Since Zecco’s launch last October, it has opened 32,000 accounts, while
TradeKing is up to 45,000 since it went live in December 2005. Those
numbers could be inflated if customers opened more than one account,
analysts say, but Zecco predicts it will become profitable in mid-2008,
while TradeKing says it’s already in the black.

"You really can
effectively promote a niche strategy," said David Schehr, research
director for Gartner, a technology research firm in Stamford, Conn.
"You don’t have to buy a lot of TV ads and build up a huge branch
network and the rest of that."

Indeed, Zecco’s marketing campaign has been Spartan, mixing guerrilla
marketing with cut-rate online ads. One notable stunt that triggered
several CNBC television news reports when Zecco launched was inspired
by a competitor who caught wind of Zecco’s plans and told a reporter
there’s "no free lunch."

Zecco hired vendors to dole out 4,000 hot dogs on Wall Street, while
"protesters" paraded around with placards bearing slogans such as "Make
love not commissions" and "Question authority (and your stockbroker)."

Free trading inevitably will also make investors question how Zecco can
give away its product and still hope to make a profit.

In short, Veth said, a brokerage that gives away stock trades isn’t
radically different from banks that gave away toasters decades ago.
Approximately 60 percent of Zecco’s revenue will come from charging
interest on margin loans and from reinvesting idle cash that investors
park in low-interest accounts.

Veth also is cognizant that free commissions are a loss leader that few
Americans actually will exploit. Though customers can make up to 10
free trades a day, only 4 percent of U.S. investors trade more than 10
times a year, according to Forrester Research. Traders who exceed
Zecco’s limits pay $3.50 a trade.

Many active traders also dabble in options transactions that still
carry commissions. Zecco hopes options will account for about a third
of its trading, while options already account for about half the trades
at TradeKing, which has honed its products to appeal to options traders.

But commissions are hardly the only source of income for brokerages.
Zecco, for instance, projects that roughly 20 percent of its revenue
will come from selling premium products like outside research and
GainsKeeper software, which tracks capital gains and tax data. It will
earn money by steering trades to certain companies, a practice known as
payment-for-order flow. And some brokerages also make money by lending
out their customers’ stock to short-sellers, who bet that the stock
will decline.

Unlike old-line brokerages, though, Zecco also hopes to make as much as
20 percent of its revenue by selling advertising if the social
networking experiment catches on.

"There is still so much money to make in the brokerage industry," said
Veth, a former Merrill Lynch executive. "Don’t get me wrong, I’m not
this new hippie kind of guy who says that trades should be free and
nobody should make money. No, I’m in this industry to make money. There
is just more besides commissions."

 

ZECCO

 

 

 

 

 

 

 

 

Business: Online discount brokerage
Headquarters: Burlingame
Web site: www.zecco.com
Launched: Oct. 9, 2006
Co-founder, CEO: Jeroen (pronounced Yer-oon) Veth
No. of accounts: 32,000
Backers: A Netherlands team that includes co-founder Dino van Es, Marcel Boekhoorn, Hans Kroon and LundKenner Ventures

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