Schwab’s Scorched-Earth Pivot to Free Commissions Torches Brokerage Sector

“My ultimate vision is realized – making investing accessible to all,” said founder and chairman Charles Schwab.

(Christopher Dilts/Bloomberg)

(Christopher Dilts/Bloomberg)

Shares of Charles Schwab tumbled Tuesday, dragging down shares of discount brokerages even more, after Schwab announced before the market open plans to eliminate commissions to trade U.S. and Canadian stocks, ETFs and options.

“My ultimate vision is realized – making investing accessible to all,” founder and Chairman Charles Schwab said in a statement about the decision.

In midday trading, E*TRADE (ticker: ETFC) was down 17.6%, TD Ameritrade (ticker: AMTD) was 22% lower, and Interactive Brokers (IBKR) was 9% lower. Schwab (ticker: SCHW) was recently down 10%.

The price changes for Schwab’s 12.1 million active brokerage accounts will go into effect Oct. 7. It was previously $4.95 for the same stock, ETF and options transactions.

Clients trading options will continue to pay 65 cents per contract. The standard online $0 commission does not apply to foreign stock trades, large block transactions that require special handling and some other trades.

The move wasn’t simply the wish of the founder. It was a move in the best interest of customers and Schwab itself, the company said. Schwab’s total client assets totaled $3.72 trillion as of Aug. 31, according to the company.

“Most importantly, it’s the right thing to do for clients, removing one of the last remaining barriers to making investing accessible to everyone and continuing our tradition of challenging the status quo on behalf of individual investors,” said Peter Crawford, the chief financial officer of Schwab.

The so-called commission trade war between the discount brokerages has been a cold one since 2017, according to Crawford. Meanwhile, Schwab has been observing new entrants to the market and leveraging zero or low-cost trading, he added.

In an explanation of the decision posted online Tuesday, the chief financial officer also said Schwab’s business is not at all dependent on revenue from commissions. Revenue per trade has been falling for years and Schwab estimates the pricing reduction will equate to approximately $90-100 million in quarterly revenue, or roughly to 3-4% of total net revenue.

“We’re not feeling competitive pressure from these firms…yet. But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants. It has seemed inevitable that commissions would head towards zero, so why wait?”

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