E*trade, TD Ameritrade Implode After Schwab Eliminates Online Trade Commissions

Just how pathetic is retail participation in this so-called “bull” market? So pathetic, that in a desperate scramble to capture market share from its discount brokerage rivals, the venerable Charles Schwab announced that it would eliminate online trade commissions for U.S. stocks, ETFs and options as part of an unprecedented price war within the brokerage sector.

According to the Tuesday statement, Schwab’s online clients will qualify for the zero commission, down from $4.95, which begins Oct. 7; clients trading options will continue to pay 65 cents per contract.

The move to make no money on most retail trades is merely the latest escalation in a brutal price war which has seen investors flock to the cheapest products. Last week, Bloomberg notes that Interactive Brokers Group announced it would offer free trades. That follows Fidelity Investments’s announcement in June that it was expanding its lineup of commission-free ETFs. Last year, Vanguard Group set off the competition when it said it would offer almost 1,800 ETFs commission-free on its platform.

Schwab previously doubled its suite of no-commission ETFs in March, bringing its total to more than 500 at the time. BlackRock iShares products were added to its platform, Schwab ETF OneSource, with 90 funds. Several fund issuers including State Street Global Advisors, Invesco Ltd., WisdomTree Investments Inc., J.P. Morgan Asset Management and Pacific Investment Management Co. also planned to add to their commission-free offerings already on the platform.

And since the already razor thin margins of the sector will get even thinner, if not negative, the stock of both Schwab and its closest competitors imploded: SCHW fell as much as 10%, its largest single-day drop in over three years; TD Ameritrade fell as much as 23%, the most since 2006; E*Trade Financial dropped 20%, the most since 2009, and Interactive Brokers slid 8.3%, the most since 2015.

Competitors “will have to follow suit,” said Kyle Sanders, analyst at Edward Jones. “It’s a commoditized business. When there’s an announcement by one firm, others play catch-up or take a more aggressive strategy.” And since the bulk of revenues already came in the form of commissions, today’s self-cannibalizing decision confirms that retail investors are no longer a material presence in the market.

Sanders said he sees Schwab’s decision as the second wave of a price war that’s already hammered fees for product issuers. Now competition on price is deepening among the brokers selling those products, he said.

That said, it’s not quite game over for the online brokers: all they need to do is find a way to boost the commissions on the only trades left that matter – stock buybacks. Good luck with that.