OptionsHouse to Raise Stock and ETF Commission

It didn’t happen very often that a discount broker raised its trade commission because that is against the trend we saw in the broker industry in recent years. In 2010 alone, big name brokers such as Vanguard, Fidelity, and Charles Schwab have all cut their commissions and begun to offer commission-free ETFs, though the number of funds eligible for free trade varies, in order to win customers amid increasing competition. With so many choices out there nowadays, I don’t think there is the justification to increase the commission since competition in the industry will only intensify, unless the original commission rate was too low to maintain.

Since I started to use a discount broker to trade stocks nearly 10 years ago, I have seen only once a broker raise stock trade commission. It was Zecco Trading a few years ago when it changed its pricing from offering zero-commission trades to everyone to a default commission of $4.50 per stock and ETF trade unless the customer has more than $25K with the broker or trades more than 25 times in a month. Now we are about to see another discount broker increase its commission. This time it’s OptionsHouse, which until now has been offering $2.95 flat rate for stock and ETF online trades regardless the number of shares.

I got an email from OptionsHouse yesterday (I have a OptionsHouse account), announcing the new stock pricing that will soon be implemented:

I want to let you know about a change we’ll be making to our stock pricing shortly. This change affects new customers only and your rates, therefore, will not be affected. However, I want to update you on these changes in the event that you see this new stock rate on our website or advertised in the marketplace.

On Thursday, January 13th, 2011, after market close, we will Introduce a new stock commission rate of $3.95, for new customers. And, as a valued customer, I’m pleased to inform you that your existing $2.95 stock rate will not be changing

When I wrote the discount broker comparison post in 2009, I put OptionsHouse as one of brokers with the lowest commissions because at $2.95 per trade, there are only a couple of alternatives with lower rates. Now it looks like that OptionsHouse is play the same strategy as Zecco did a few years ago: Started lower than most in the field, heavily promote the product, then raise the rate unexpectedly.

While the email from OptionsHouse is pretty clear on when the new rate, $3.95/trade, will become effective, the question is what happens to those accounts opened between now and January 13th. To clarify the issue, I contacted OptionsHouse and asked specifically what my rate will be if I open an account today. The answer I got via online chat is

the account application must be filled out by Jan 12th to keep the $2.95. if it filled out on Jan 13th or later you will be assigned the $3.95 rate.

I also asked the account needs to be funded and I was told that “You just need to fill the application out no later than the 12th” to get the old $2.95 rate.

Just from the cost point of view, $2.95 is a very low commission in today’s environment and $3.95 is still much lower than what most discount brokers charge for trading stocks and ETFs (see my comparison post for broker commissions on stocks, ETFs, and mutual funds). Therefore, if you want to lock in a low rate, it doesn’t hurt to open an account with OptionsHouse before the rate goes up (OptionsHouse is still offering promotions for new accounts such as 1-year free The Wall Street Journal subscription), even though you may not like the change of pricing it is making.

This is also why even though I have accounts with quite a few cheap brokers, I still use Scottrade for almost of my trading. It’s $7.00/trade is expensive than many, but I don’t think I will worry something like this happen to Scottrade.

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