Todays Charles Schwab Announcement Initiates a Panic Sell-off in Online Brokerages
Charles Schwab (NYSE:SCHW) announced Tuesday that it will no longer charge commission fees to its customers following a growing trend in the brokerage industry of lower and lower pricing. I think this is turning into a trend where I bring you all the bad news of the day. Competitors TD Ameritrade (NASDAQ:AMTD) and E-Trade (NASDAQ:ETFC) were absolutely hammered on the news with shares losing over 20% and 15% respectively. Founder and Chairman Charles Schwab said, “From day one, my passion has been to make investing easier and more affordable for everyone. Beginning October 7, every Schwab client can trade U.S. stocks, ETFs and options commission-free. Eliminating commissions ensures my ultimate vision is realized – making investing accessible to all.”
Brokerages face increasing competition and pricing pressure in a saturated market. Start-ups such as Robinhood have attracted a variety of retail customers with free trading over recent years and are in the middle of a pre-IPO process. While these smaller start-ups are attracting customers it remains to be seen if this new fee schedule has a major impact on the much larger brokerages such as Charles Schwab which currently has more than $3.7 trillion in client assets utilizing its services. The company has a market value of about $54.7 billion and the company is looking to add additional assets to its service. In 2017 when the company last lowered its prices the company added about $800 billion dollars to its service.
This is how Charles Schwab is looking to make up the expected reduction in quarterly revenue from the commissions that it was previously collecting which added up to approximately $90 to $100 million in quarterly revenue. The actual commission revenue was already a decreasing part of the business and had been for years with this portion only making up about 7% of the revenue generated by the company. This is not altogether unexpected since lower commission fees have been a long term trend and since 2013 with the launch of Robinhood putting significant pressure on all brokerage companies. Since that time, “Charles Schwab has returned only 7.9% per year, below the 11% annual return of the S&P 500. TD Ameritrade has returned even less at just below 5% a year.” CNBC reports. Unfortunately, some of the other brokerages aren’t in the same position to transition to the $0 commission fee structure.
TD Ameritrade, for example, receives about 25% of its revenue from commissions and E-Trade receives about 16% of its revenue from the same source. In the end, this will be great for retail traders making smaller trades where fees on each transaction would make up a larger proportion of each trade. In the meantime, this is leading to a short term brokerage bloodbath for these entities as price pressures and competition push down pricing structures and impact revenue.