Have you wondered why OptionsHouse recently increased its stock trading commissions from $2.95 to $3.95 per trade for all new customers? (Previous customers still get the low $2.95 commission.)
At BrokerInsider, we have some special insights. If you’ve ever worked at an online brokerage, you should know that a commission increase is a very scary thing, because it is easy to get bad press or lose existing customers. The worst part, however, is that your customer acquisition might slow to a trickle — and there is no way to model this in advance.
But OptionsHouse must have done it for two reasons:
First, low commissions make profitability very difficult. While it may seem like the history of stock commissions is one of constant price reduction, they can’t actually fall forever. Stock trades do have a cost — about $1 per trade on the wholesale market — and a $2 profit isn’t very much unless you have incredible volume. OptionsHouse’s profit is probably a little higher because they are a subsidiary of PEAK6 Investments, but not much.
Second, low prices don’t attract many new customers. The difference between $8.95 (which is what you’d pay at Schwab) and OptionsHouse’s new $3.95 commission is just not that high, especially for casual traders. And if price were everything, OptionsHouse (or before them, Zecco) should have claimed the whole market. It turns out online brokerage customers just don’t move that quickly. More likely, they get used to the interface of a brokerage and are loath to move unless something really bad happens.
In summary, this is price increase is not so surprising, and we predict other brokers will follow suit. If there’s any advice we have, it’s sign up for your new discount broker now, because brokerages are highly likely to grandfather low pricing for customers who joined before the commission increase.