Disintermediation Update – On-Line Brokerages
The stock brokerage business was one of the first industries that was fundamentally disintermediated by the Internet. In an earlier post I both wrote about the history of the stock brokerage business and about William Yeh, the Chairman of Sogo Invest. Yeh was the man who, by launching SogoInvest where active traders could take advantage of $1.00 trades, completed the 30 year history of the deregulation and disintermediation of the stock brokerage business.
In an interview Yeh gave to fellow blogger Grant Wittenborn, he made it clear that he felt the day trader and the average investor should be given the low cost opportunities available to institutional investors. He was clear in that interview that he hoped to have people with Sogo over the long term to take advantage of low cost investing, and that for the new or smaller trader he would provide easy purchase of fractional shares. In a conversation I was fortunate to have with Yeh he explained to me that, based upon stock exchange and clearing costs, any trading fee lower than $1.00 would be a money loser.
Well, look at what has happened since SogoInvest opened its doors for business on July 11th. Bank of America, one of the financial giants that had taken it on the chin during the last ten years of disintermediation has come out withâ€™ freeâ€™ trades. Given the amount of marketing dollars they are spending, it is clear that trading canâ€™t be free. Sure enough, the terms and rules necessitate large balances, low interest rates and various other restrictions. Another firm, Zecco has also come out with â€˜freeâ€™ trades but they seem to also have hidden costs. One thing they do is give you 1% on cash balances at a time when 4-5% is the norm. They also have a list of charges you incur on a variety of transactions or function. But, you can trade for â€œfreeâ€
Part of the definition of disintermediation is that if the intermediary remains in place, it will be drained of excess compensation. Yeh did that with SogoInvest. Now others are getting on his bandwagon. Imitation is the sincerest form of flattery. I am amused that others are so enthralled with the disintermediation of the on-line brokerage business that they claim to offer trading at no costs. Of course there are costs for traders with every firm they might choose to deal with. Each trader must decide to accept the costs that are stated upfront as in Sogo, or accept the other costs with a Bank of America that may be in smaller print.
Readers of this blog know that I respect Yeh for taking the last true step of disintermediation in the brokerage business. I also respect him for being honest and upfront about what his customers can expect to pay. All of this reminds me of two quotes from two favorite writers. The great science fiction writer Robert Heinlein wrote that â€œThere ainâ€™t no such thing as a free lunchâ€, or TANSTAAFL. The singer songwriter Tom Waits wrote/sang: â€œThe large print giveth and the small print taketh awayâ€. Good words of advice in a world where some marketers still think of us as stupid.