Banking & Finance

Online and Discount Trading Firms See More Carnage From Zero-Commission Efforts

The world of trading stocks, bonds, mutual funds and exchange-traded funds has been an ever-changing landscape. Charles Schwab Corp. (NYSE: SCHW) came public in the 1980s and its model as a top discount brokerage firm with lower commissions was viewed as a direct and credible threat to the traditional brokerage model with high commissions. Then the initial public offering of E*Trade Financial Corp. (NASDAQ: ETFC) in 1996 acted to validate the business model of the coming waves online trading and discount brokers, in which Charles Schwab participated and still does.

Perhaps the biggest issue among the transaction-oriented financial firms has been the belief that commissions and trading fees were in a long-term race to zero. The ETF and mutual fund landscape has moved toward ever lower fees, next to zero fees in some cases.

The Charles Schwab announcement that it would go to zero commissions and fees on stock, ETF and options transactions rocked the world of online and discount brokers. Charles Schwab even managed to make its own shareholders feel the brunt of that announcement.

Charles Schwab shares were was down 9.7% at $37.76 on Tuesday on about four times normal volume after it decided to gut the electronic brokerage sector by going down to $0 commissions. It was down another 3.1% at $36.57 on Wednesday. JPMorgan maintained its Overweight rating but cut its target to $44 from $48. Credit Suisse pointed out that Schwab has $3.7 trillion in assets under management and that a low percentage of its revenues are tied to commissions, so the firm maintained its Outperform rating with a $49 target price.

E*Trade closed down 16.4% at $36.51 a share ahead of the call based on the zero-commission trading from Charles Schwab. In Wednesday’s midday trading, its shares were down another 3.3% at $35.31. Barclays downgraded it to Underweight from Overweight and cut the price target to $31. UBS reiterated its Sell rating and cut the target to $33 from $36, while Deutsche Bank maintained its Hold rating but cut its target to $34 from $37.

TD Ameritrade Holding Corp. (NASDAQ: AMTD), which has the most exposure to commission trading as a percentage of revenues, and which matched the zero-commission efforts, was down almost 26% at $34.67 on about 15 times normal volume on Tuesday after the Charles Schwab announcement. TD Ameritrade was down another 3.5% at $33.44 in midday trading on Wednesday. Barclays downgraded it to Underweight from Overweight and cut the price target to $31 from $57. UBS maintained its Buy rating but cut its target to $40 from $54, and Deutsche Bank maintained its Hold rating while slashing its target to $34 from $46.

Interactive Brokers Group Inc. (IBKR) fell 9.4% to $48.72 on Tuesday’s post-Schwab news, and it was down another 3% at $47.23 midday on Wednesday. Interestingly enough, Interactive Brokers had launched its own version of IBKR Lite a week or so earlier with free commissions and no fees. On Wednesday, Compass Point decided to upgrade Interactive Brokers to Buy from Neutral with a $56 target price.

These moves may be great for customers, but there will be continued pressure on brokerage fees, trading commissions, investment management fees and so on in the quarters and years ahead.


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