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 took the biggest hit, tumbling as much as 23%, the most since 2006. E*Trade Financial dropped 20%, the most in more than a decade. Shares of Interactive Brokers Group and Schwab both slid about 10% at 11:30 a.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.
“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.”
Schwab’s move also may prompt Ameritrade and E*Trade to reconsider a merger, Ritter said.
Schwab previously doubled its suite of no-commission ETFs in March, bringing its total to more than 500 at the time. BlackRock Inc. iShares products were added to its platform, Schwab ETF OneSource, with 90 funds. Several fund issuers including State Street Global Advisors, Invesco, WisdomTree Investments, J.P. Morgan Asset Management and Pacific Investment Management. also planned to add to their commission-free offerings already on the platform.
For Schwab, offering free trades is the ultimate extension of its roots in the 1970s as a discount broker.
“Eliminating commissions ensures my ultimate vision is realized — making investing accessible to all,” Schwab’s billionaire founder and Chairman Charles Schwab said in the statement.
— With assistance from Bloomberg’s Emma Vickers.