If You Can't Beat Them, Join Them By: Gabriel PotterMBA, AIFA® 2019.11.26

We had previously reported on the competition for the brokerage landscape, with several major players dropping equity trading fees to zero just a few short weeks ago.  Charles Schwab started that fight on October first, but it didn’t take a full day of business for prime competitor, TD Ameritrade, to announce that it was following suit and cutting fees to zero for stock and ETF transactions.  It soon became clear that competitors, like Interactive Brokers or E-Trade, were not going to leave the space just because of a pricing war.  So, how are the discount brokerages going to continue the fight to dominate the retail investor space?  

The title of the blog is a pretty big clue on how it can be done.  The big news this morning is that Charles Schwab is going to buy TD Ameritrade for $26 billion. 

The brokerage giants have decided that the best way to stay competitive in the space is to get huge and take advantage on the economies-of-scale.  That’s Wall Street’s interpretation anyway.  Usually, when there is a large buyout like this, it is typically recognized as a wealth-transfer; in practical terms, the buyer’s stock is expected to go down while the bought-firm’s stock goes up.  That didn’t happen in this case:  both TD Ameritrade and Charles Schwab stock went up in premarket trading.  So, premarket traders seem to agree that there are synergistic benefits for the merger for both companies, at least in excess of whatever premium Charles Schwab is paying to receive TD Ameritrade.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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