October 3, 2019

Breakingviews: U.S. online stockbrokers reap what they once sowed

by Breakingviews.

Charles Schwab was a disruptor once. It started in 1971 as a broker offering discounted trading fees. By the turn of the millennium it gave traditional players like Merrill Lynch – and their stock prices – a dunking by showing how the internet could transform the business. Now the $48 billion company is trying again, only this time it’s defending its own turf.

On Tuesday Schwab unveiled a plan to set virtually all trading fees to zero. Rivals TD Ameritrade and E*Trade Financial followed, while Interactive Brokers had made its own stab at it, for less active customers, last week. By midafternoon on Wednesday the four had lost a combined $19 billion in market value, 17% of their total capitalization at the close of trading on Monday.

The loss of commissions may be a price worth paying if it leads to an increase in market share, assets under management, or both. Some two decades ago, that was a fair bet: The stock market was booming, it was all the rage for people to trade stocks, and incumbents like Merrill and Morgan Stanley were slow to adapt.

Now, though, Schwab and its peers face their own threats. Upstarts like Robinhood offer free trades, while bigger old-school names have their own ideas. JPMorgan, for example, waives commissions for customers’ first 100 trades. And more pressure has come from the rapid rise of very low-fee index and exchange-traded funds offered by giant asset managers like Vanguard.

Schwab’s move will lop some 7% off its top line. It’s worse for E*Trade, which on Wednesday said some 11% of revenue would evaporate based on second-quarter earnings. TD Ameritrade stands to lose a quarter or more. Interest income is a big money spinner, but with rates dropping that will suffer, too. The alternatives are to increase the volume of assets they manage, on which they can still charge fees, and to cut costs.

The price war is a kind of karma for the financial behemoths the online upstarts targeted years ago. It may even present an opportunity. E*Trade, for example, regularly faces calls to sell itself. This latest development may yet prompt the likes of JPMorgan, Goldman or even Schwab to come knocking.

(This item has been updated to reflect the E*Trade announcement.)


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