AMTD TD Ameritrade Holding Corporation

By Alexander Osipovich, Colin Kellaher and Allison Prang 

Charles Schwab Corp. said it would eliminate commissions on online stock trades, the latest and most dramatic move to date in the e-broker price wars.

The move rattled the online brokerage industry. Like many Wall Street firms, e-brokers have been squeezed in recent years by growing expectations among investors that fees for financial services should be low -- or even nonexistent.

Shares of TD Ameritrade Holding Corp. plummeted 21% in morning trading, putting the company on track for its biggest percentage move since 2006. E*Trade Financial Corp. was down 18%, and Schwab was down 8%.

The three firms' declines wiped out $12 billion in aggregate market value.

Another rival, Interactive Brokers Group Inc. -- which set the stage for Schwab's price move when it announced last week that it would launch a zero-commission stock-trading service -- fell 7%.

Compared with its rivals, Schwab is more reliant on its banking arm and less dependent on commissions, which make up only about 7% of total revenue. TD Ameritrade, meanwhile, derives about a quarter of its revenue from trading.

E-brokers had already been hurting because of falling stock-trading volumes this year and the U.S. Federal Reserve's lowering of interest rates, which reduces how much the firms can make by collecting interest on clients' cash. Following Schwab's move, analysts warned that other e-brokers would be forced to follow suit, putting them on track for a potentially ruinous race to zero.

"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."

The race to zero also shows the disruptive impact of Robinhood Markets Inc., the Silicon Valley startup that popularized the concept of zero-commission trading.

Founded in 2012, Robinhood has amassed around six million users, many of them millennials, with its easy-to-use 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.

Even JPMorgan Chase & Co. got in on the game last year by unveiling its You Invest product, which offers customers at least 100 free stock or ETF trades per year and is aimed at younger, first-time investors.

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.

Schwab's change 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 contract.

Fees for trading options have been particularly resilient, even as other prices fall, and online brokers have worked to boost the amount of options trading their clients do.

Charles Schwab said its move, which is effective Oct. 7, is aimed at making online investing more affordable. It noted that new firms entering the market often use zero or low commissions as a lever.

"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?"

Keeping services less costly for customers has been a focus of Schwab's. The company has also tried to make financial planning cheaper for customers.

Charles Schwab said the pricing reduction is equivalent to about $90 million to $100 million in quarterly revenue, which roughly translates to 3% to 4% of total net revenue. However, the firm said its commissions per revenue trade have been falling for several years, "so the potential revenue impact in coming quarters could very well be smaller."

TD Ameritrade said it was reviewing the Schwab announcement. "We will remain competitive," a spokeswoman for the Omaha, Neb.-based brokerage said. E*Trade and Robinhood didn't immediately respond to requests for comment.

"The more the merrier," Interactive Brokers Group Inc. Chairman and Chief Executive Officer Thomas Peterffy said in an email.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com, Colin Kellaher at colin.kellaher@wsj.com and Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

October 01, 2019 11:29 ET (15:29 GMT)

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