Charles Schwab is betting the decision to lower or eliminate trading fees will help it attract customers, who've grown more vocal about the cost of investing. "It's the right move from a competitive standpoint," said Peter Crawford, Charles Schwab's chief financial officer, in a statement. "There has been a clear pause in the so-called commission wars among the 'traditional' e-brokers since the price reductions we made in 2017."
Brokers make most of their money via interest income on their clients' deposits, but fees and commissions account for a significant share of their earnings also. Charles Schwab's commission and fee income fell last year. It relies less on commissions and fees than its rivals, so it can better withstand the price war's effects.
Although they rely more on commissions, TD Ameritrade and ETrade Financial quickly followed Schwab's lead with cuts of their own, alarming investors. Fidelity Investments, the largest online brokerage, joined them on Thursday and said it is dropping commissions for online trades of U.S. stocks, ETFs and options. Fidelity is privately held.
Charles Schwab expects the move to cut up to 4% of its revenue, while TD Ameritrade expects a much harsher impact with up to 16% of its revenue slashed. The news trimmed about 15% from Charles Schwab's stock price and more than a quarter of TD Ameritrade's.
The brokers also face growing competition from companies like Robinhood, which formed in 2013 and offered free online trading. "Zero commissions" are now a reality and companies like Charles Schwab and TD Ameritrade will likely take actions to defend profit, including cost cuts, wrote Raymond James analyst Patrick O'Shaughnessy, in a note to investors.
The race to zero could help the brokers if it encourages greater overall trading volume, O'Shaughnessy wrote. Brokerages are also trying to stand out from competitors in avenues other than cost. Fidelity, for example, touts how it automatically steers retail investors' cash into accounts with higher yields than competitors do.
The brokers are likely to "allow the dust to settle" before the price war's next escalation, which could see cuts on contract option fees or other products, O'Shaughnessy said.