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Sunday, December 23, 2007

Why I Will Never Recommend Zecco as a Brokerage

Ones may notice that I do not mention Zecco, or that I flatly refuse to recommend Zecco as a trading brokerage.

Zecco first showed up on the radar as the brokerage that offered commission free trading. You needed a $2,500.00 balance to open an account with them, and they allowed you up to 40 free trades a month, and 10 free trades per day. Wouldn't this be considered ideal for the low funded trader? Well, not so fast.

Zecco has recently been accused of 'bait and switch' tactics. Is this true? Well before we continue, let's first turn to the definition of a bait and switch:

"In retail sales, a bait and switch is a form of fraud in which the fraudsters lure in customers by advertising a product or service at an unprofitably low price, then reveals to potential customers that the advertised good is not available but that a substitute is. The goal of the bait-and-switch is to convince some buyers to purchase the substitute good as a means of avoiding disappointment over not getting the bait, or as a way to recover sunk costs expended to try to obtain the bait. It suggests that the seller will not show the original product or product advertised but instead will demonstrate a more expensive product." - "Bait and Switch" (Wikipedia)

So, is this what Zecco did? That's the question. It's not a matter of their price structure, or if Zecco is still a good deal. It's not a matter of whether or not Zecco had a unprofitable price structure. It's not even a question of how much you need in your account to trade with them. The question is, did this company perform a form of fraud, according to the above definition? Would you truly wish to be involved with a company that engaged in a form of fraud?

Sometime around June, 2007, Zecco announced that the were eliminating the $2,500 minimum balance to open an account with them. But they were retaining their cost structure of 10 free trades per day, up to 40 trades free per month. A positive change for the low-funded trader.

However on October the 1st, 2007, Zecco announced that they were changing their price structure and offer. In the future, customers would need to have a minimum balance of $2,500 once again. And no longer would there be 10 trades per day up to 40 trades free per month. From December 31st forward, there would only be 10 free trades per month, and all other trades would cost $4.50.

So we have them changing their initial deposit from $2,500.00 to $0. Then, months later, they once again rise the amount all customers will need in their account on January 1st, 2008 back to $2,500.00, and eliminate 40 free trades per month. What was the reason that Zecco provided for this negative change to their price structure?

I will quote from their own faq page.

"Is Zecco Trading cutting the number of free stock trades because you’re having problems sustaining your business?

No. Free trading is our business. We’re fine-tuning our business by adjusting the offer to meet our customer’s actual needs. We are committed to leveling the playing field for the everyday investor. Over the next few months, you’ll see the results of our investments in customer service and trading platform functionality, including the addition of 3 and 4 legged options strategies, release of a sophisticated options analytics platform, access to ZeccoShare, the ground-breaking investor social network at, as well as fantastic new premium services at a typically fantastic Zecco price"

So their reason for the negative change to their price structure, is the addition of what? What they offered was not as good as the upcoming substitute offer.

This is the very definition of a bait and switch.

How does Zecco reply to this charge? Again, let's look to their own faq page.

"Are the free stock trades Zecco Trading’s bait and switch marketing scam?

No. Free trades are not a marketing ploy, they are our business model. We absorb the small cost of stock trading commissions because the richest streams of income in the brokerage business are in interest in margin and cash balances. With the changes to our free stock trading deal, we’re making significant investments to bring you the tools and functionality our customers need."

That in no way replies to the charge of performing a bait and switch. They in fact, confirmed that they were performing a bait and switch by stating the negative change to their price structure was due to offering improved services for their customers.

Perhaps they don't understand a simple truth.

That is the very definition of a bait and switch.

At this time, the Better Business Bureau has downgraded them to a CCC rating. Zecco has performed, according to the definition, a bait and switch. Regardless of their price structure, I could never in good conscience recommend to the low funded trader, that he become involved with such a company. I would recommend ING's "Sharebuilder", which in the 4 years I've been with them, has never pulled these sorts of shady maneuvers. In fact, over the last 4 years, Sharebuilder has consistently improved their price structure, and offered better deals to their customer. They just announced lowering their real time trading commssions by almost 40%. This is the reason that I will always recommend a brokerage like Sharebuilder, over a brokerage like Zecco.

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