Charles Schwab will eliminate commissions for trading stocks, ETFs and options on its mobile and web platforms for securities listed on US and Canadian exchanges starting Monday, Oct. 7.
Major online brokers have been rattled by today’s announcement. At the end of trading today, Charles Schwab (SCHW) closed down 9.73%, E*TRADE Financial Corp (ETFC) down 16.43%, TD Ameritrade (AMTD) down 12.03% and Interactive Brokers Group Inc (IBKR) down 9.48%.
Schwab’s move to eliminate commissions follows an announcement last week that Interactive Brokers would implement similar zero commissions on its ETF and stock trades. More than half of Schwab’s revenue is generated from the financial advisor community that has client’s custody at Schwab suggesting the race to the bottom in pricing crosses many aspects of the asset management industry.
As noted on CNBC, traditional online brokers and retail brokers have charged relatively low rates per trade in recent years, not feeling it to be too big of a deal, only for the pressure of startups to make an impact on where things have gone to zero.
Robinhood Taking Alternate Path To Bullseye
Digital upstart Robinhood has been leading the charge with its zero-commission model as it attempts to revolutionize the online-brokerage business.
Robinhood is able to offer the free trading by selling their customers’ orders to so-called wholesale market makers, such as Citadel Securities and Virtu Financial (VIRT.O), which aim to make a profit on the spread between the bid and the offer on the shares.
Like Robinhood, traditional brokerage companies are able to generate revenue in many other ways.
Stephen Biggar, director of financial institutions research at Argus Research, told Reuters that commissions long ago stopped being a primary revenue item for Schwab, dropping to 8% of revenues last year and currently under 5%.
Related: Moat Index Bounces Back Ahead of Review
Biggar noted that net interest income from customer deposits and asset management fees are far more important.
According to a regulatory filing quoted by Reuters, Schwab made $139 million from selling its customers’ orders in 2018, up 22% from the previous year. Meanwhile, TD Ameritrade was paid $458 million for customer orders in its last fiscal year, up from $320 million the year before, according to a filing.
Last summer, JPMorgan Chase & Co (JPM.N) began offering free stock trades for self-managed accounts through its mobile banking app.
Merrill Edge self-directed platform members receive up to 100 free online stock and ETF trades per month.
Meanwhile, Wells Fargo charges $5.95 per online stock/ETF trades and offers a discounted rate of $2.95 for those who link their WellsTrade brokerage account to their Wells Fargo Bank.
The Impact of Eliminating Commissions
Ameritrade and E*Trade are geared more towards the “per trade commission” setup, while Schwab has more asset manager intentions in mind.
There’s also the question of whether or not there is more rationalization between these various brokers in 6 or 12 months for them to make their margin almost as big as before, but through a bid spread wider. However, the counter to that is how automated it all is, which will keep the margin from becoming as large.
One of the main things to be seen from this, so far, is how stocks are getting hit after there’s been a relatively comfortable setup for such a long time. Although, 10 to 20 years ago, it would be hard to imagine such a setup working the same way, with Schwab, at that time, being the cheapest.
CNBC notes how Schwab has had a bad 18 months share price performance after getting hit by the Fed cutting rates. However, Schwab did have a good market share run and the way their market cap caught up with the market share of Goldman Sachs (GS), for example, with the automation helping in structure.
Watch CNBC Go Over This News On Schwab:
For more market trends, visit ETF Trends.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.