U.S. Markets

Brokerages' race to zero fees points to a bigger war to come

NEW YORK/BOSTON (Reuters) - Fidelity Investments Inc and Charles Schwab Corp made moves in quick succession on Tuesday to slash trade commissions, accelerating the race to zero and foreshadowing a more important battle to win clients for potentially more lucrative services.

A sign marks a Fidelity Investments office in Boston, Massachusetts, U.S. September 21, 2016. REUTERS/Brian Snyder/File Photo

Fidelity cut its commissions to trade stocks and exchange-traded funds to $4.95 from $7.95 a trade, a 38 percent reduction for its retail brokerage clients.

Rival Schwab swiftly followed by slicing its own fees on standard online trades to $4.95, from $6.95. Both companies also reduced pricing on options.

TD Ameritrade also said late Tuesday it would reduce its online equity and ETF trade commissions to $6.95, from $9.99.

The deep cuts intensified an already fierce competition to lower fees in the investment industry, and the shares of Schwab and several other brokerages fell as markets weighed the potential for profits to be strained by discounts.

But the announcements also indicated the ambitions of brokers to win over clients to digital investment advice and other fee-based offerings. Mergers and acquisitions could be the next frontier for that battle.

“There’s this race to zero,” said Noah Hamman, chief executive of AdvisorShares, a provider of ETFs, who earlier in his career worked in Fidelity’s trading business. “To be in that business you’ve got to have other services.”

The industry’s top players are “seemingly locked in a price war,” with the goal of attracting clients to other services, Citigroup analyst William Katz said in a note.

That pricing pressure raises concerns about the companies’ earnings power, he said, as M&A comes into focus as a potential strategy to add clients.

Shares of TD Ameritrade fell by nearly 10.5 percent on Tuesday, its largest one-day percentage drop since the 2008 financial crisis.

E*Trade Financial Corp’s stock slid by more than 7 percent and Schwab was down by more than 3 percent, their worst performance since Schwab last lowered its fees on Feb 2. All three stocks charted deeper losses earlier in the day.

Shares in TD Ameritrade were hit the hardest, as it derives about 42 percent of revenue from trading fees, the biggest exposure of the three listed companies.

Boston-based Fidelity’s online brokerage business has 17.9 million accounts and $1.7 trillion in total client assets. The company said its efficient processing of trades and other services make it the best value.

Fidelity also cut rates for investors who trade on margin, or with borrowed money from the brokerage.

San Francisco-based Schwab has 10.2 million active brokerage accounts and $2.83 trillion in client assets.

“Please don’t miss the bigger picture here,” Schwab’s chief financial officer, Joe Martinetto, said in a statement calling the fee cuts a “growth strategy.”

“This is a company that is performing extraordinarily well.”

The fee-cut announcements offered a reminder of how much trading costs have come down for investors.

Robinhood, a commission-free trading app for retail investors, said they were “happy” that Fidelity lowered its fees.

“Ideally, they would have eliminated them altogether, along with the required $2,500 account minimum,” it said in a statement.

Reporting by Trevor Hunnicutt and Tim McLaughlin; Additional reporting by Dan Burns, Sinead Carew and Sangameswaran S; Editing by Jennifer Ablan and Jonathan Oatis