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Money for Nothin', ETFs for Free

Friday, 8 Oct 2010 | 11:55 AM ET

When was the last time you got anything for free?

This morning, TD Ameritrade joined Charles Schwab, Fidelity and Vanguard in offering commission-free trades on some ETFs. Of course, there are restrictions and the restrictions vary by company. But being the skeptic, you have to ask, why are discount brokers offering commission free trades for what is the hottest product in equities? What's in it for them? Could this have anything to do with issues surrounding high frequency trading? Pay for volume? Or good old fashioned arbitrage.

There are some obvious reasons for dumping commissions — land grab for funds from the full service brokers — stock volume has been low, investors are still on the sidelines and brokers are looking for ways to get the retail investor back in.

But, CNBC anchors Mark Haines and Simon Hobbs had a chance to grill TD Ameritrade President & CEO Fredric Tomczyk about the move and his motivation today on CNBC. His answer was less than enlightening. Something about borrowing the idea from the mutual fund space, targeting the long term retail investor.

Regarding, commission — free ETFs "Is it a loss leader?" Simon Hobbs asked.

"Essentially, we're not making anything" replied Mr. Tomczyk.

Pressed by Mark Haines, CEO Tomczyk said "We're not making anything, but we're not losing anything."

If, as Mr. Tomcyzk claims ETFs are somewhere in the "mid-teens" as a percentage of their trading, that is a large chunk of business to be flat on.

But, there is some healthy skepticism about that motivation in the marketplace. David Kotok, ETF investor, CNBC Contributor and CIO of Cumberland Advisors says he has considered there could be a more immediate profit motive including, arbitrage opportunities.

When a retail customer goes into an electronic trading firm he / she doesn't have the most sophisticated equipment to track his / her order and he says, "there may be some way to arb profits." But when David places a large institutional order, his technology tracks the order and he says, "we take all the steps possible to avoid paying some hidden arbitrageur or markup."

Brokerage firms must be in dire straits. Reminds me of a song.



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Stocks mentioned in this post

TD Ameritrade

Charles Schwab

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