Is the fee price war building up to a bigger battle?

With two major brokerages cutting fees in quick succession, observers foresee a new frontier for battle

Is the fee price war building up to a bigger battle?
A significant reduction in trade commissions by Fidelity Investments was quickly followed by one from Charles Schwab. The exchange showed a seemingly urgent need among brokerages to win the price war – and could be leading to competition in another space.

Fidelity cut commissions for trading stocks and ETFs from US$7.95 to US$4.95 per trade, slashing costs by 38% for its brokerage clients, according to Reuters. Not to be outdone, Schwab sliced its own fees for standard online trades from US$6.95 to US$4.95. Both companies also reduced prices on options.

TD Ameritrade subsequently announced plans to cut down its online equity and ETF trade commissions from US$9.99 to US$6.95.

The trend toward undercutting among brokerage firms is reaching fever pitch, leading investors to ponder its potential to squeeze profits. However, the announced cuts could eventually be followed by efforts to attract clients via digital investment advice and other fee-based offerings – which could mean a fiercer battle for mergers and acquisitions (M&A).

“There's this race to zero,” AdvisorShares CEO Noah Hamman, who formerly worked at Fidelity, told Reuters. “To be in that business you've got to have other services.”

Citigroup analyst William Katz reached the same conclusion, noting that the top players who are “seemingly locked in a price war” to attract clients will likely entice them with other offerings, which puts M&A in the spotlight as a possible strategy for advancement.

That’s all in the potential future. For the moment, investors seem to be regarding the race to zero as a game of chicken, and shares of brokerage companies have suffered as a result. At one point, declines in E*Trade Financial’s share prices exceeded 7%, while Schwab’s stock price fell more than 3%. TD Ameritrade, which derives about 42% of its revenue from trading fees, also took a hit in share prices.

“Please don't miss the bigger picture here,” said Schwab Chief Financial Officer Joe Martinetto. “This is a company that is performing extraordinarily well.”

Robinhood – a firm offering commission-free, app-based trading to retail investors – said in a statement that it was “happy” about Fidelity’s decision to lower its fees. “Ideally, they would have eliminated them altogether, along with the required $2,500 account minimum,” the firm said.

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