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RETAIL REPORT: Could Consolidation Come Amid Broker Fee Cuts?

Will there be some upheaval in the retail brokerage space as a result of some major players reducing trading commissions to zero?

There could be, said one prominent analyst.

According to Jessica Rabe, Co- Founder at DataTrek, the decision to cut trading commissions to zero has had a definitive impact.

To recap, Charles Schwab announced that it will no longer charge commissions on online stock trades, effective Oct. 7. TD Ameritrade followed suit, saying it would also offer zero-commission trades.

Founder and Chairman Charles Schwab said, “From day one, my passion has been to make investing easier and more affordable for everyone. Beginning October 7, every Schwab client can trade U.S. stocks, ETFs and options commission-free. Eliminating commissions ensures my ultimate vision is realized – making investing accessible to all.”

Schwab CEO and President Walt Bettinger emphasized, “This is our price. Not a promotion. No catches. Period. Price should never be a barrier to investing for anyone, whether an experienced investor or someone just starting on the investing path. We’re proud to provide clients with a full-service, modern investing experience that delivers on our no trade-offs combination of service, simplicity and superior value – backed by a satisfaction guarantee2. In support of the valued independent investment advisors we serve, the same pricing will apply to their clients when trading at Schwab.”

In sum, beginning October 7, 2019, the company will reduce U.S. stock, ETF and options online trade commissions from $4.95 to zero.

Shares of Schwab fell more than 10% on fears the change will hit margins. The broker said commission fees make up 3% to 4% of net revenue each quarter.

Rival brokerage firm TD Ameritrade responded by also dropping its charged commission rate to zero on trades which resulted in its stock dropping more than 26% for its worst day in 20 years right after the announcement. It previously charged customers $6.95 per trade.

TD clients trading options will now pay $0.65 per contract with no exercise and assignment fees.

“We are committed to giving our clients the best possible investing experience, with cutting-edge technology and award-winning investor education and service teams. And now, that experience just got better,” said Tim Hockey, president and chief executive officer of TD Ameritrade. “We’ve been taking market share with a premium price point, and with a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients.”

Rates will be effective for TD Ameritrade retail clients, as well as clients of independent registered investment advisors that utilize TD Ameritrade Institutional. A final pricing schedule will be available on Oct. 3, 2019.

E*Trade too dropped its trading fees to zero. It estimates a quarterly revenue impact of $75 million from dropping fees.

But DataTrek’s Rabe said that others were hurt by the news. She reported that these moves cut $1.7 billion of market cap from ETRADE Financial, as well as $6.6 billion from TD Ameritrade and an undeterminable amount from the values of private companies like Fidelity and financial conglomerates that offer retail stock/bond/options trading. She added that old timers will recall that the trend to lower retail trading costs actually started in 1975, when the SEC first allowed negotiated commissions.

“Charles Schwab itself was an early entrant in the discount brokerage space on the back of that regulatory change,” Rabe said. “But it took the Internet, mobile computing, and venture capital backed brokers targeting millennials to get commissions to zero. And here, we suspect, they will stay.”

So, what can we expect next?

Consolidation among the brokers.

“The bottom line here is that M&A is a natural result when an industry goes through a disruptive shift that makes its products/services cheaper, better, or more responsive to customer needs,” she said. “Scale may not return an industry or its participants back to returns on capital that existed before the disruption came along. But for many of its competitors, mergers will be better than the alternative.”