Like so many other industries, there are small players and big players.
Little fish in a very large pond may be another applicable cliché to describe this story. The pond is the brokerage business and that pond is big.
Companies like Fidelity, the world’s largest retirement account holder has 13.5 million accounts, E*Trade, one of the most well known of the brokers for retail investors has 3.9 million accounts and TD Ameritrade has 5.7 million.
In the past, there were plenty of smaller discount brokers but most were bought by the larger firms.
Schwab acquired OptionsXpress for $1 billion and TD Ameritrade acquired Thinkorswim for an undisclosed amount.
As the big brokers keep getting bigger, there was little room to compete if you were still holding on as one of the smaller firms in the highly competitive field of discount brokerage.
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This was true for two small firms, Zecco and Tradeking.
New companies often open their doors because they want to do things differently. They want to challenge the traditional models and solve the problems that other companies have been unable to address.
The financial services industry might invest in trendy technology with their clients’ funds but not with their business. Financial services have very little use for social media but Tradeking and Zecco wanted to change that. Clients using their platform can place trades directly from Facebook and participate in social media driven investing communities as well as trade without account minimums.
Not only is social media a focus for these companies, pricing more suited to the smaller retail trader is one of the reasons that Tradeking has been voted best in customer service for the past three years.
But even with some standout services and a trading experience that customers like, Tradeking and Zecco knew that they weren’t able to compete with the larger brokers.
TradeKing and Zecco to Merge
On May 15th, 2012, Tradeking and Zecco announced a merger that would consolidate several billion dollars in client assets and create a company with 500,000 clients.
This would make them the 6th largest firm behind Schwab, E*Trade, TD Ameritrade, Scottrade, and Fidelity.
Along with the social media capabilities, the two companies will give customers more trading options.
From TradeKing CEO Don Montanaro:
TradeKing and Zecco share a similar mission, applying pressure on the industry to give the individual investor a far better trading experience and a far greater value. By merging, we have an opportunity to ratchet up our ability to influence the direction of the online brokerage industry. We believe this is great news for clients of both firms and investors as a whole.
Tradeking concentrated on equity options and Zecco offered Foreign exchange trading along with the more traditional stocks and options. Together these specialties will combine to add more options for investors.
[Related: TradeKing Review]
Even as a combined company, some analysts are skeptical that they can compete with the top five. Most consumers have seen the commercials for the top five brokerages but have probably never heard of Tradeking or Zecco.
In some industries, size is important and that is true in the brokerage business.
Consumers are more likely to trust their money to larger financial institutions instead of taking the chance on a smaller, less known company even if the price and features appear to be better. These two headwinds may prove to be too much for the combined company.
Still, this could be great for Tradeking which already gets high praise for its customer service and low-price trades.
In an industry filled with big players and deep pockets for advertising, this merger not only makes sense from a competitive standpoint but combining services to give customers more for the same low price is a smart and likely necessary step, according to analysts.
What do you think of the Tradeking and Zecco merger? Are you a customer of either?
See more from the CEOs of TradeKing and Zecco:
Eric J. Nisall - DollarVersity says
It would be interesting to see what happens going forward. Smart Money just came out with their Discount Broker Rankings and had TradeKing and Zecco 6th and 7th respectively with banking product offerings, pricing in terms of fees, and research among the categories that were lacking. I’d be curious to see if any of those concerns are addressed and/or improved upon, considering it will have a (possibly) stronger customer base as the foundation of the company going forward.
To be honest, it would have take a heck of a lot for me to leave E*Trade for either of the individual companies, but mergers always make me a bit skittish, and now would not even consider a move there for at least a year or more. I would have to have plenty of time to evaluate the viability of the new company, as well as see what becomes of the powers that be from each as the smoke clears.