Shares of online brokers plunged for the second consecutive day after the end of commissions for trading by major brokerage firms. The online-broker fee wars have been severe this year as firms are giving stiff competition by lowering their prices in order to attract customers under their hood.
The commission war was started last week as Interactive Brokers Group (IEX: IBKR) launched its own IBKR Lite zero-commission service. Charles Schwab (NYSE: SCHW) followed with its plans to lower online trade commissions of US stock, exchange-traded fund, and options from $4.95 to $0, starting on October 7, 2019. Following this, TD Ameritrade Holding (NASDAQ: AMTD) cuts commissions from $6.95 to $0, effective October 3, 2019.
After Schwab’s move, the shares of online brokers including Schwab, Interactive Brokers, TD Ameritrade, and E*Trade Financial (NASDAQ: ETFC) have fallen straight for the second day. Investors fear that commission-free trading could hurt the results of the companies as a portion of the revenue is forgone while the period of impact remained unknown.
TD Ameritrade expects its move to have a revenue impact of about $220 million to $240 million per quarter or about 15% to 16% of net revenues, based on June quarter fiscal 2019 revenue. Schwab expects the pricing cut to impact the top line by about $90 million to $100 million or 3% to 4% of total revenue.
The market experts believe that most of the online brokers are likely to experience a similar impact on their revenue and experience an increase in expenses related to the forgo of commission. This pricing cut will increase the headwinds faced by the industry as they need to find better ways to attract customers and generate activity.
The pricing war among online brokers has created an inevitable zero or near-zero commissions on the trading services commoditization. The stocks are expected to be priced accordingly to reflect the new industry dynamic. The shares are likely to shed the fat as the fierce competitive pressures will hurt the trading volume of the companies.
The companies in the online brokers’ industry are likely to experience a shrink in the client base if the commissions for the trading services are not competitively priced after the move taken by Schwab and TD Ameritrade. Also, the companies could face an impact on the bottom line due to the loss of commissions and an increase in expenses. The upcoming earnings season could possibly leak out information with regard to the impact of pricing cut on the companies.