On Tuesday, October 1st, Charles Schwab announced they would stop charging commissions for online trading in US stocks, ETFs, and options. The very same day, TD Ameritrade announced that it would follow suit and cut fees to zero for stock and ETFs transactions.
The other players got on board quick. Interactive Brokers and E-Trade also slashed trading costs to zero in the same week. The other competitors in the brokerage space must maintain their minimal cost approach (e.g. Robinhood), or competitive in a hurry.
There are still a few holdouts in the integrated advisor space, like Fidelity or Vanguard, but their business model (and bulk of revenues) never centered on equity trading. Besides, many of these integrated shops have been aggressively cutting fees in other ways (e.g. – Fidelity’s costless index funds or Vanguard’s recent low-cost robo-advisor rollout).
Is cutting revenue good for business somehow? Not really. While it may be necessary to maintain (or increase) assets under management, but it doesn’t magically generate revenue for these companies in any obvious way. For an example, Schwab gets about 25% of its revenue from these trading fees, approximately $95 million per quarter. Unsurprisingly, losing a huge slice of revenue isn’t good for business. The combined stock value (i.e. stock capitalization) for these brokerage firms lost billions last week.
We’ve been arguing for the commoditization of the traditional broker business model for years, not as advocates per se, but simply acknowledging its inevitability. This is what we were talking about. Still, even though we knew it was coming, the speed of the competitive responses was still impressive. Getting the decision makers together and changing the core business model of multi-billion dollar enterprises within a day is monumental.