TD Ameritrade announced late today it would match Charles Schwab Corp. and it slashed commissions on stocks and ETFs to zero in response to Schwab's move. The ramifications for discount brokerages could be far-reaching.
"We are committes 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."
What's good for customers may be bad for investors in discount brokerages. Shares of the biggest online brokerages plummeted Tuesday after market leader Charles Schwab Corp. announced plans to eliminate commissions for U.S. stocks, exchange traded funds and options.
TD Ameritrade Holding Corp. took the biggest hit, tumbling as much as 25%, the most since 2006. E*Trade Financial Corp. dropped as much as 20%, the most in more than a decade. Shares of Interactive Brokers Group Inc. and Schwab both slid about 10% as of 3:15 p.m. in New York.
The move escalates a long-simmering price war as investors gravitate toward the cheapest products, with Interactive Brokers announcing just last week that it would provide free trades. Since the middle of last year, firms including Fidelity Investments, Vanguard Group and JPMorgan Chase & Co. have eliminated fees and commissions on a range of offerings.
Even before TD's announcement, analysts anticipated the move. “They’ll have to follow suit,” Kyle Sanders, an analyst at Edward Jones, said of Schwab’s competitors. “It’s a commoditized business. When there’s an announcement by one firm, others play catch-up or take a more aggressive strategy.”
Schwab’s online clients will qualify for zero commissions, down from $4.95 per trade, starting Oct. 7, the firm said in a statement. It will continue to charge a fee of 65 cents per contract for options trades.
Ameritrade is more exposed than its closest rivals because the company gets more than a third of its revenue from commissions in fees, said David Ritter, a senior analyst with Bloomberg Intelligence.
“It’s a double-whammy for them,” he said. “For the biggest of the big like Schwab, they’re best able to absorb and monetize in other ways.”
While Schwab, with about $3.75 trillion of client assets, gets a majority of its revenue from net interest income, its decision to eliminate commissions comes at a perilous time because of historically low interest rates. Last month, the San Francisco-based company said it was cutting 600 jobs, or about 3% of its workforce, citing “an increasingly challenging economic environment.”