By Alexander Osipovich and Lisa Beilfuss
Charles Schwab Corp. said it would eliminate commissions on
online stock trades, one of most dramatic moves yet in a
broad-based price war that is crunching profitability across the
The move by Schwab -- the largest e-broker, with 12 million
brokerage customers -- rattled online brokers that have been
squeezed by investors' expectation that fees for financial services
should be low or even nonexistent. Shares of larger banks and
brokerages also declined amid a 1% drop in the Dow Jones Industrial
Average, reflecting soft U.S. data that reignited concerns about
the economic outlook.
Digital upstarts like Robinhood Markets Inc. help popularized
the zero-commission model in the online-brokerage business. But the
race to zero is also happening in other areas of finance, like
asset management, where Vanguard Group and Fidelity Investments
recently eliminated fees for many funds offered on their platforms,
and financial advice, which some digital advisers are offering free
of management fees.
"There are certain parts of finance that have become
commoditized," said Devin Ryan, an analyst at JMP Securities LLC.
"Trading is one of them."
Shares of TD Ameritrade Holding Corp. plummeted 24% in midday
trading, putting them on track for their biggest one-day percentage
move since 2006. E*Trade Financial Corp. was down 16%, and Schwab
was down 9%. The three firms' declines wiped out nearly $13 billion
in aggregate market value.
Another rival, Interactive Brokers Group Inc. -- which set the
stage for Schwab's price move last week when it announced plans to
launch a zero-commission stock-trading service -- fell 9%.
E-brokers had already been hurting because of falling
stock-trading volumes this year, as concerns over slowing economic
growth have made investors more cautious. Interest rate cuts by the
U.S. Federal Reserve have dealt another blow, by cutting into
e-brokers' ability to collect interest on clients' cash.
Analysts warned other online brokers would be forced to follow
"There is no way to sugar coat this development," analysts at
Wells Fargo said in a research note. "We were hoping the
challenging macro environment (i.e. declining interest rates) would
prevent the industry from competing on price like this, but that is
clearly not what is happening."
Schwab may be better positioned to weather the storm. Compared
with its rivals, it is more reliant on its banking arm and less
dependent on commissions, which make up only about 7% of total
TD Ameritrade, meanwhile, derives about a quarter of its revenue
from trading. For E*Trade, commissions comprise about a fifth of
Some e-brokers may need to merge with competitors to survive,
JMP's Mr. Ryan said. That process has already been under way, with
TD Ameritrade acquiring Scottrade in 2017.
Online brokerages like E*Trade became hot during the 1990s
dot-com boom, as day trading took off. But they've recently lost
ground to the likes of Robinhood, the Silicon Valley startup that
has lured many first-time investors and traders.
Founded in 2012, Robinhood has amassed around six million users,
many of them millennials, with its smartphone app that lets
investors buy and sell stocks without paying a fee. Robinhood's
success has sparked an array of imitators offering free stock
trades, including Webull, M1 Finance, TradeZero and Dough.
A spokesman for Robinhood said, "The changes taking place across
the brokerage industry reflect a focus on the customer that's been
inherent to Robinhood since the beginning."
Even the biggest, boldest names in financial services have been
forced to play this game. JPMorgan Chase & Co. last year
unveiled its You Invest product, which offers customers at least
100 free stock or ETF trades a year and is aimed at younger,
first-time investors. Bank of America Corp.'s Merrill Edge also
offers some commission-free online stock and ETF trades, an
offering it expanded in February.
To make money, zero-commission brokerages like Robinhood rely
heavily on a controversial practice called "payment for order
flow," in which they route customers' orders to buy or sell shares
to electronic trading firms like Citadel Securities and Virtu
Financial Inc., in return for cash payments. Robinhood is also a
lean operation that doesn't spend money on legacy operations like
the bricks-and-mortar storefronts offered by TD Ameritrade and
A broad investor retreat from actively managed funds to cheaper
index funds has pressured fees charged by asset managers, hurting
the profit margins of traditional stock-picking firms. In some
cases fees have also sunk to zero.
Last summer, Vanguard Group said it was making online trading
free for almost all ETFs bought and sold through its brokerage
platform. A month later, Fidelity Investments unveiled in the first
zero-fee index funds. Fidelity later expanded the number of ETFs
that trade at no fee on its own platform to more than 500.
Free financial advice is also cropping up, disrupting the
business of old-school financial advisers who typically charge 1%
to 2% of a client's assets annually. In 2014, Schwab announced its
system that uses algorithms to provide portfolio-management
services. For some customers it has waived fees for the digital
advice, in exchange for a relatively high cash allocation that
flows into Schwab's bank. Robo-adviser Wealthfront Inc. last year
made its automated financial planning free to anyone who downloads
the company's app.
Schwab's move on trading fees is set to take effect Oct. 7. It
applies to commissions for stocks, exchange-traded funds and
options listed on U.S. or Canadian exchanges. The San Francisco
financial-services company currently charges a commission of $4.95
for online U.S. stock, ETF and options trades. Charles Schwab said
clients trading options will continue to pay 65 cents per
"We don't want to fall into the trap that a myriad of other
firms in a variety of industries have fallen into and wait too long
to respond to new entrants," Chief Financial Officer Peter Crawford
said in a note on the company's website. "It has seemed inevitable
that commissions would head towards zero, so why wait?"
Other online brokers grappled with the prospects of a race to
zero. TD Ameritrade said it was reviewing the Schwab announcement.
"We will remain competitive," a spokeswoman for the Omaha,
Neb.-based brokerage said.
A Fidelity spokeswoman declined to say whether her firm was
considering a commission cut of its own. "We will always look for
ways to leverage our scale to deliver even more value," she
Vanguard is "happy to see others in the industry continue to
follow our lead in reducing the cost of investing," a spokeswoman
said. E*Trade did not immediately respond to requests for
Interactive Brokers said it welcomed Schwab's announcement,
which came just five days after the firm unveiled its
commission-free "IBKR Lite" platform.
"The more the merrier," the company's Chairman and CEO Thomas
Peterffy said in an email.
--Justin Baer and Dawn Lim contributed to this article.
Write to Alexander Osipovich at email@example.com
and Lisa Beilfuss at firstname.lastname@example.org
(END) Dow Jones Newswires
October 01, 2019 14:03 ET (18:03 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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