• Schwab and TD Ameritrade cut online trading fees to $0 for US stocks, ETFs & options
• Competition in the brokerage industry is very strong
• Consumers benefit even as the business model for the brokerage companies come under pressure.
On Tuesday, Charles Schwab & Co. pushed fee competition to a new level indicating they would eliminate fees for online trading of US stocks, exchange-traded funds and options starting Monday (Oct 7th). Previously, the commission was $4.95 per trade. Option trading includes a $.65 per contract fee. Shortly after Schwab’s announcement, TD Ameritrade matched the cut and the change went into effect today. “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,” said Tim Hockey, TD Ameritrade’s president and chief executive officer, in a press release.
The industry has experience a rapid wave of price cuts. One of the biggest drivers for the competition has been silicon-valley startup Robinhood. Robinhood is an app that allows trading for $0. They have over 4 million customers and launched in 2013. While Robinhood is one factor, the price cuts and consolidation among the top players is also another factor as industry consolidation continues. Some analysts expect Fidelity, Vanguard and e-Trade will have to match the price cuts. Also, E-Trade could be the next company to be swept up in an industry acquisition.
According to a CNBC article here, estimate vary as to how much of a revenue impact the fee cuts will have on the companies. TD Ameritrade had been deriving a higher percentage of revenue from commissions then Schwab had. Barclays downgraded the entire online brokerage sector to ‘underweight’ after cutting its ‘most lucrative trading product’.
The brokerage houses derive fees from a number of difference sources including spreads on interest rates paid on cash balances, revenue flows derived from directing order flow to specific exchanges, mutual funds fees and fix income trading spreads. It’s an amazing transformation that we have seen over the past decades. When I first started trading stocks commissions were in the $50 dollar range. Technology has allowed the brokerage companies to increase productivity and provide great service to clients.