By Scott Martin

E-Trade could be about to get a taste of its own medicine.

Online brokerages, whose discount trading model once turned the industry upside down, could now be next in line to get tossed on their heads.

JupiterResearch released a report Friday that details an Internet brokerage market under attack by the emergence of yet lower-cost startup trading services online. This new breed is part of an era of super low sub $3 commissions.

“So it’s sort of like these new guys are doing to the E-Trades of the world what the E-Trades were doing to the Schwabs of the world,” JupiterResearch analyst Asaf Buchner said. “That sort of disrupted the business of the full-service brokers.”

Jupiter said in the report that the online brokerage market is suffering from slow growth and intensifying competition. The researcher cited a mature market in which online traders are expected to increase at a 4 percent compound annual growth rate over the next five years.

What’s at stake is a multi-trillion-dollar market in which customers have grown to expect savvy services in both online banking and low-cost brokerages.

Analysts at Jupiter forecast online trading will have entered 22.6 million households by 2011. From 2006 to 2011, Jupiter expects the amount of assets held in online accounts to jump by about 50 percent, from $2.1 trillion to about $3 trillion.

However, the research firm said that some of the growth will be stock market dependant. For example, in December 2006 major U.S. indices were significantly up for the year, fueling a 7 percent increase in the number of online trading households.

The expansive growth in a bull market in particular points out the growth opportunities. By contrast, the dot-com bust of 2001 had such a chilling effect on the market that trading was down, commissions were fewer, and brokerages merged along with the overall industry contraction.

Now is the next revolution in brokerages. Jupiter’s report said this new batch of online brokerages threatens to disrupt existing business models. The researcher pointed to a raft of hungry challengers, among them SogoInvest, launched in 2006, noting its innovative approach.

Low-Cost Entrants

It’s about cheap commissions. SogoInvest has cut its commission costs because its parent company, Genesis, owns a trading execution system, the analyst noted. SogoInvest is able to charge $1.50 to $3 for equity trades.

“The biggest pain is the fact that someone is offering trades at very low commissions—and that’s affecting the incumbent players,” Mr. Buchner said.

Getting undercut hurts. He said those pricing pressures can force others to take a hit and adjust their prices downward.

Startup Zecco is out to steal away business as well (see Startup to Offer Free Stock Trades). Zecco offer 40 free trades per month, more than enough for most average home traders—with the exception of day traders. Zecco’s business model comprises revenue from advertising, charges on option trades, commissions for equity trades above the 40 free, and from interest made off customers’ idle balances.

“So they’re sort of like Yahoo Finance meets E-Trade,” Mr. Buchner said. “It’s like they have two legs. Think of Google AdSense.”

Aggressive upstarts’ pricing, noted Jupiter, will intensify competition, bringing trading commissions to new lows.

Another potential threat is Internet brokerage TradeKing. While not quite as low cost—TradeKing boasts $4.95 trading commissions—it has caught some attention for its services since its December 2005 debut. TradeKing was started by the same entrepreneurs who formed online brokerage Suretrade, which was sold to Quick & Reilly, a Bank of America unit.

“The lowest that existed before these guys was Scott at $7,” Mr. Buchner said referring to Scottrade.com.

Meanwhile, Sharebuilder.com has taken a different attack. It has a plan that lets customers buy stocks for $4 or less in what it calls an automatic investment plan. Their plan is to go after investors who aren’t trying to execute exact trades but rather want to place regularly scheduled purchases of stock weekly or monthly. It’s a more hands-off approach investor tool.

“Sharebuilder buys stock in batch, so it’s cheaper to buy when everyone buys at same time,” Mr. Buchner said. “They’re actually quite successful. Their pitch is for the light traders and light investors.”

Retail Banks Circle In

To make matter worse, retail banks have swooped in from above to grab a bite of Internet brokerages’ business. With increased brokerage services, Bank of America and Wells Fargo are starting to go after similar service of these once-early adopters.

E-Trade, TD Ameritrade, Schwab, and Fidelity will feel the pinch most, Mr. Buchner said. While these firms are getting squeezed on both sides, longer-term the retail banks pose more threat because of their customer relations and trust.

E-Trade, however, is not going down without a fight. The analyst noted that the online brokerage has pushed aggressively into banking, targeting deposits and mortgages.

But retail banks will be able to cross-sell brokerage accounts to their existing customers. Bank of America and Wells Fargo have already built a bond by successfully setting up online. Jupiter data shows that only 6 percent of customers with online banking accounts have a brokerage account with their bank, representing an opportunity for banks to try to pull them in.

The researcher also noted that 46 percent of online bankers have shown interest in an online investing account, compared with 21 percent of those who expressed interest who do not have an online banking account.  

Bank of America offers up to 30 free equity trades per month for customers who keep $25,000 deposited (see Bank Offers Free Online Trades).

“It’s almost like the revenge of the brick-and-borders of the world.” Mr. Buchner said. “Now the banks can come and have an advantage by having both of these product lines.”