Thursday, December 28, 2006

Test driving Zecco.com, part 2

Gathering from your questions after the first part of this review, there is a lot of interest in Zecco.com and their promise of zero commission trades. In the concluding portion of this review, I’ll describe my impressions about their order execution, answer some reader questions, as well as relay some difficulties I’ve been having.

Order execution
First of all, Zecco is true to the name. Both buy and sell orders, market or limit, are free. You do have to pay the usual SEC fees upon selling. At $30.70 per million it shouldn’t break anyone’s bank.

Zecco claims the industry standard of 30 seconds for order handling. It doesn’t offer level II quotes but through another online broker I was able to see my limit orders routed through the Pacific Stock Exchange (PACX) only seconds after they were entered. On one occasion, I modified an existing limit order and it took over a minute to appear. It’s probably faster to cancel existing orders and enter new ones rather than using the “modify” function if such things matter to you.

Zecco also offers stop market and stop limit orders, but not conditional orders. I give their order execution a 4.5/5.

Reader questions TJP asked if they offer dividend reinvestment. My original answer was “no” which was incorrect. From their FAQ,

Does Zecco Trading allow account holders to automatically reinvest dividends for equities and exchange traded funds? Yes, dividend reinvestment is a feature that is available to our clients and can be setup during the account opening process. If you would like to add this feature after the account opening process is complete, you must submit the request in writing to our customer service department.
However, you can’t buy fractional shares at this moment.

Taz asked if there is a fee associated with ACH transfer. The answer is no, but it may take up to three days for the money to go through. Taz also asked a question regarding the $2500 minimum account balance to get zero commissions. The account balance is defined as the sum of the market value of all the securities and the free cash balance. The minimum applies to the account balance, not the free cash balance, so it doesn’t keep the $2500 tied up.

Trouble with my account
I’ve received reader comments about how thrilled they are with Zecco. Not surprising given what I’ve said so far. However, I have been experiencing some serious problems in my account personally.

This is what happened. I opened the account primarily to test a momentum trading model with holding period of several days on average. Naturally, the promise of zero commission was extremely attractive. My first trade involved 50% of the capital and lasted 5 days with a 1.4% profit. Everything went smoothly and I was able to use the full amount right after exiting that position (customary in a margin account). My second trade deployed close to 100% of the capital which I exited 2-3 days later at an average profit of 1%. However, I noticed that my cash was locked up for 3 days (customary in a cash account). To my horror, I also noticed that my balance became much less than what it should have been.

For some reason my account was deemed “subject to IRS backup withholding” of 28%. The punch line was that it was 28% of sales, not of profits. So after two profitable trades that turned over nearly 150% of my capital, my account is down 150% x 28% ~ 40% from what it should be.

Apparently, this was caused by some missing paper work. It happed frequently enough that Zecco actually has a page about this, titled, no joke, “Where is my money?” There is also an active thread in their forum about this.

Here are my gripes,

  • I followed the instructions after the on-line application and mailed in the signed W-9 form. My missing form (not required for all applicants) was not mentioned in those instructions. I found out about the missing form after the withholding had already taken place by calling customer service. As a matter of fact, the customer service rep promised that someone would contact me regarding the form, but no one did and I got the form myself from their website.
  • My biggest gripe was that nowhere on the website was there any record of the withholding. It was as if the money simply evaporated. If you follow the forum link above, you will find the issue was first raised at the end of October. The president of Zecco actually responded to that thread so I’m sure management is aware of this. Elsewhere on their website they say they are working with Penson, their clearing firm, to resolve that issue. At any rate, they have known the problem for at least 6 weeks and nothing has been done. This is unforgivable because I can’t imagine a more pressing concern than proper accounting of the customers’ money.
  • I faxed as well as mailed in the hard copies of the required forms last Tuesday. On Thursday there was a power outage in the middle of my call with a service rep. On Friday, I was finally able to confirm that all the needed paper work would be in place after the hard copy arrives.
  • Through out this ordeal, my emails were never answered. It was quite tricky to reach a live operator, although I’m getting good at it.
  • On more than one occasion, the customer service rep had to put me on hold for several minutes while looking up my file which makes me question their information organization system.

The other problem I had with money market sweep was probably related. Currently, I’m earning only 1% on the free cash balance. One person from Zecco’s marketing department contacted me to offer help after reading my remarks in the comment section of the previous post. I declined since I wanted to have the perspective of a typical customer.

They did say on their website that if they don’t receive the proper paper work within 30 days, Penson will forward the withholding to IRS. For now, I can only hope that I get money back soon.

Conclusion
One reason I waited so long to finish my review was that I was simply livid about the missing funds. As they say, you shouldn’t go food shopping while hungry… Bad analogy but you get the picture. Had I written this a week ago the tone would have been very much different.

I decided to try Zecco in the first place because of their “anti-establishment” feel, and I still want them to succeed. But I have to face up to how unpolished they are now. So I’ll make the following limited recommendations. I think Zecco is good for:

  • Experienced online investors who use Zecco as an alternative account. This is somebody who knows exactly what she wants and who sets up everything right in one shot.
  • Novice investors who care a great deal about trading cost and who is content with the basic buy and sell operations.

If you do decide to open up an account at Zecco, do learn from my experience: send in all your forms!

This entry was appeared at www.1stmillionat33.com.