Rival firms are expected to follow suit, which analysts expect will lead to pain across the brokerage sector
The end is nigh for commissions in the online brokerage industry as T.D. Ameritrade announces that it is eliminating all commission fees for online U.S. stock, ETF, and option trades on its platform.
Shortly after U.S. online investing giant Charles Schwab on Tuesday revealed its own decision to remove such commissions starting October 7, T.D. Ameritrade shared its plans to do the same beginning October 3. “Like Schwab, TD Ameritrade will charge 65 cents per contract for options trades,” reported ThinkAdvisor.
“With a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients,” Tim Hockey, president and CEO of T.D. Ameritrade, said in a press release.
T.D. Ameritrade takes a big hit
Schwab’s move triggered a collapse in the share prices of online brokerages, with T.D. Ameritrade shares tumbling 26%. Analysts took note of the latter’s higher reliance on commission revenue; an analysis by Morningstar cited recent figures showing that T.D. Ameritrade derives some 32% of revenue from trading and E-Trade, while its operating margins approach 50%.
Steven Boyle, T.D. Ameritrade’s CFO, said scrapping commissions is expected to reduce quarterly revenues by an estimated US$220 million-US$240 million per quarter, which translates to roughly 15% to 16% of net revenues. By contrast, Schwab’s CFO Peter Crawford estimated its own move will have a 3% to 4% impact on quarterly revenue.
The firm said it will provide more information about its fiscal 2020 plan when it reveals its fourth-quarter earnings later this month. T.D. Bank Group, meanwhile, said that it expects the decision to have a proportional effect on its reported equity in net income of an investment in T.D. Ameritrade for fiscal 2020.
Industry facing its zero-commission fate
As reported by CNBC, the writing has arguably been on the wall for the industry since 2013, when the first offer of free stock trading was made by Silicon Valley start-up Robinhood. Vanguard eventually responded by slashing fees on ETF trades, and J.P. Morgan Chase unveiled its own free trading app in August last year.
“We expect Fidelity and E*TRADE to react next and announce cuts to their own commission rates over the short-term, with both likely matching SCHW’s/AMTD’s zero rate,” Credit Suisse research analyst Craig Siegenthaler said in a client note. On Wednesday afternoon, E*Trade revealed plans to cut its trading commissions to zero effective October 7.
Echoing Siegenthaler’s outlook, Barclays downgraded the entire brokerage sector on Wednesday, handing out a recommendation to underweight for eliminating its “most lucrative trading product. Others have weighed in saying that consolidation is the only way out for some players, with E*Trade being singled out as the most likely target for acquisition.
