The Next Online Brokerage - Built By You

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Of interest?? From Zeev's board:

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NEW YORK (Dow Jones)--And now for the $5 stock trade.

Escalating the price war at discount brokers, Ameritrade Holding Corp. (AMTD) is testing a program called IZone that cuts its regular commission price by more than half.

The bare-bones program is available online or by touch-tone phone only, and doesn't include customer-service assistance, live price quotes, news, research or other tools that Ameritrade offers to customers who pay its conventional $10.99 for stock trades.

"We're testing how experienced, self-directed clients respond to different price points," said Ameritrade spokeswoman Donna Kush. "There are some ways to make revenue doing this, but that is also why we are testing this."

Ameritrade's move comes as Charles Schwab & Co. (SCH) and other rivals have been cutting commissions in an attempt to lure Ma and Pa investors back to the stock market. The lower rates, combined with a rising stock market, have increased volume at many brokerage companies, but some analysts are concerned that overall revenue may be declining because of the discounts.

"Management across the industry claims there is no pressure to reduce price, yet everyone seems to be doing it," said David Trone, an analyst at Fox-Pitt Kelton who thinks rival discount brokers will match Ameritrade's program. "It's price erosion with no ultimate benefit to anyone but investors."

Ameritrade, the biggest discount broker measured by its customers' trading volume, began testing the 12-week pilot in five cities about two weeks ago. It is sending direct-mail pitches to some rival companies' customers in New York, and also advertising in local papers and on radio in Los Angeles, Chicago, Denver and Phoenix, Kush said.

Any qualifying investor who opens an account with at least $5,000 also can sign up for the program at www.ameritradeizone.com. In an effort to ensure that users are self-sufficient investors, Ameritrade requires IZone users to have two years' experience as a discount broker client and at least two years' experience as an Internet user, the site says.

Kush said the Omaha, Neb., company's conventional $10.99-per-trade price remains compelling because the plan includes streaming quotes, intraday charts and real-time account information. IZone users must pay an extra $9.99 per month, after a three-month free introductory offer, for those features, and more for analytical tools and news reports. If they call for broker-assisted orders, they must pay at least $24.99 per trade.

Fox-Pitt Kelton's Trone said the broker is betting that enough new customers will pay monthly fees for the extra service to make up for the lower commission income, but he is skeptical. "Too many customers may just sign up for the reduced rate and get tools online for free at their existing brokers," he said, adding that Ameritrade's own customers may cross over to the lower-priced plan, he said.

Trone doesn't own Ameritrade shares, and his company won't solicit investment banking business from the discount broker in the next three months.

Schwab, the biggest discount broker by number of customers, twice cut its commission rates last year from its standard $29.95 price. Its lowest current rate is $9.95 per trade for customers who keep $1 million with the firm and make 30 or more trades a quarter (or 120 annually). A Schwab spokesman didn't comment on whether the company would respond to the Ameritrade pilot.

Scottrade Inc. recently cut rates on limit orders, which set specific buying and selling limits and are the kind used by most active traders, to $7 from $12 a trade. It previously offered $7 trades only for market orders.

Full-service firms such as Wachovia Corp. (WB), Merrill Lynch & Co. (MER) and Morgan Stanley (MWD) charge about $75 for trades made through their brokers, although rates vary according to core services provided and assets that customers keep at the companies. They also usually offer Internet-only trades for about $29.99.

BrownCo, a discount broker owned by JPMorgan Chase & Co. (JPM), currently advertises a $5 commission rate but limits it to orders of up to 5,000 shares.

The Ameritrade program has no share limits and also heavily discounts option trades, charging $8 for online market orders and $13 for limit orders, plus $1.75 per contract. Brown charges a minimum of $20 for options, lower than its six biggest competitors, according to its Web site.

Kush said she didn't know how long customers could continue trading at the $5 rate if the company decides to curtail the program. But they do have an alternative.

Since 2000, Ameritrade has been targeting very active stock traders with a program called FreeTrade which has no charge for the first 20 trades they make each month. They then pay on a sliding scale, beginning as low as $3 for up to 100 trades.

"Part of this program is to evaluate FreeTrade," Kush said. "We're checking to see what price point is right and how clients respond at different price points."