24/7 Wall St.

Word from The Wall Street Journal is that discount broker giants TD Ameritrade (ATMD) and E*Trade (ETFC) are working on a merger that would create a company with 11 million accounts. According to the paper "E*Trade and TD Ameritrade have been in serious discussions for weeks."

Putting the two companies together could result in large savings in public company, management, and back-office costs.

ETFC is trading well down from its 52-week high of over $26. It now sits well below $16. AMTD trades at $16.35, well down from its high of $21.31. The costs of getting customers in a competitive market are rising, and discount brokers are under pressure to cut the costs of trades to keep the customers they have from going to lower-cost providers.

And, there’s the rub with the deal. Just as the government has looked hard at the Sirius (SIRI) merger with XM (XMSR) and the Whole Foods (WMFI) and Wild Oat (OATS) mergers, it may simply nix the AMTD deal with ETFC. A number of smaller brokers could find that they are squeezed out as two of the three largest firms in the industry become one. Operators like Fidelity, Zecco, Trade King, and Options Express will probably raise fair objections.

When it appeared that the Whole Foods merger would go through, Wild Oats’ shares soared. Investors know just how much these mergers mean to price leverage.

Douglas A. McIntyre