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Schwab Triggers Online-Broker Bloodbath as Price War Deepens

John Gittelsohn and Annie Massa

(Bloomberg) -- Shares of the biggest online brokerages plummeted Tuesday after market leader Charles Schwab Corp. announced plans to eliminate commissions for U.S. stocks, exchange traded funds and options.

TD Ameritrade Holding Corp. took the biggest hit, tumbling 26%, the most since 1999. E*Trade Financial Corp. dropped 16%, the most in more than a decade. Shares of Interactive Brokers Group Inc. and Schwab both slid more than 9%.

The move escalates a long-simmering price war as investors gravitate toward the cheapest products, with Interactive Brokers announcing just last week that it would provide free trades. Since the middle of last year, firms including Fidelity Investments, Vanguard Group and JPMorgan Chase & Co. have eliminated fees and commissions on a range of offerings.

See also: JPMorgan offers free trades in escalating fight for retail

“They’ll have to follow suit,” Kyle Sanders, an analyst at Edward Jones, said of Schwab’s competitors. “It’s a commoditized business. When there’s an announcement by one firm, others play catch-up or take a more aggressive strategy.”

Schwab’s online clients will qualify for zero commissions, down from $4.95 per trade, starting Oct. 7, the firm said in a statement. It will continue to charge a fee of 65 cents per contract for options trades.

Double-Whammy

Ameritrade is more exposed than its closest rivals because the company gets more than a third of its revenue from commissions in fees, said David Ritter, a senior analyst with Bloomberg Intelligence.

“It’s a double-whammy for them,” he said. “For the biggest of the big like Schwab, they’re best able to absorb and monetize in other ways.”

While the San Francisco-based company, with about $3.75 trillion of client assets, gets a majority of its revenue from net interest income, its decision to eliminate commissions comes at a perilous time because of historically low interest rates. Last month, the brokerage said it was cutting 600 jobs, or about 3% of its workforce, citing “an increasingly challenging economic environment.”

Read more: Schwab to cut 600 jobs as falling rates crimp interest income

Schwab’s move also may prompt Ameritrade and E*Trade to reconsider a merger, Ritter said.

Schwab previously doubled its suite of no-commission ETFs in March, bringing its total to more than 500 at the time. BlackRock Inc. iShares products were added to its platform, Schwab ETF OneSource, with 90 funds. Several fund issuers including State Street Global Advisors, Invesco Ltd., WisdomTree Investments Inc., J.P. Morgan Asset Management and Pacific Investment Management Co. also planned to add to their commission-free offerings already on the platform.

The cut to zero commissions is an inevitable industry trend that Schwab is trying to get ahead of, its Chief Financial Officer Peter Crawford said in a separate statement Tuesday.

“We are seeing new firms trying to enter our market -- using zero or low equity commissions as a lever,” Crawford said. “It has seemed inevitable that commissions would head towards zero, so why wait.”

Robo-Advice

The company last cut its retail trading commissions to $4.95 from $6.95 in February 2017, matching cuts by Fidelity. Since then, assets at the firm have grown by about $800 billion from a combination of market gains and net new inflows.

The brokerage can make up for lost revenue by offering advice to clients approaching retirement, said Alois Pirker, Aite Group’s research director for wealth management.

“They’re looking at their client base and saying, ‘what do our clients need right now?’ They need advice and they need portfolios,” Pirker said.

Schwab has a range of advice offerings, from a free basic robo-advice platform to dedicated financial advisers, whose fees can start at 0.8% of assets per year.

For Schwab, offering free trades is the ultimate extension of its roots in the 1970s as a discount broker.

“Eliminating commissions ensures my ultimate vision is realized -- making investing accessible to all,” Schwab’s billionaire founder and Chairman Charles Schwab said in the statement.

(Updates share prices in second paragraph.)

--With assistance from Emma Vickers, Ben Steverman and Peter Eichenbaum.

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net;Annie Massa in New York at amassa12@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, ;Pierre Paulden at ppaulden@bloomberg.net, Vincent Bielski, Melissa Karsh

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