Several hours following Charles Schwab's announcement that they were eliminating trading fees for stocks, ETFs and base options trades, TD Ameritrade announced that they, too, were chopping fees, effective October 3, 2019. Like Schwab, this doesn't mean TD Ameritrade customers will be free of all trading fees. Clients will still pay a per-contract commission on options trades of $0.65, the same as Schwab.
This move will put some hurt on the firm's revenues, however. Schwab's revenue from commissions was just under 6% for the quarter ending March 31, 2019, but TD Ameritrade generated 32% of its net revenue from commissions for the quarter ending June 30, 2019. The firm also reports revenue from net interest revenue, bank deposit account fees, and investment product fees.
TD Ameritrade generated 32% of its net revenue from trading commissions in the quarter ended June 30, 2019.
Steve Boyle, TD Ameritrade's CFO, said in a statement, “We expect this decision to have a revenue impact of approximately $220-240 million per quarter, or approximately 15-16 percent of net revenues, based on June Quarter fiscal 2019 revenue." The firm will release additional information on its next earnings report, but the 15-16% estimate seems optimistic.
Franklin Gold, who spent many years at Fidelity Investments and is now a digital financial solutions consultant based in Needham, MA, believes that brokers will have to recoup the costs of providing market data to their clients in some fashion. "Schwab has been extremely vocal about market data for many years," he states.
TD Ameritrade has offered its clients unlimited streaming real-time data on multiple platforms simultaneously, which is very expensive. Gold expects that pressure will be put on the exchanges given how much they charge for real-time market data, and foresees recouping some of those costs via subscriptions paid for by clients. Steve Quirk, VP of active trading for TD Ameritrade, does not expect to see any pricing changes for market data in the near future, saying in an email that decisions about subscriptions are "TBD, but I would not expect any major changes."
One of the dirty secrets of options trading is that orders are almost all sent to market makers, who pay the brokers for their order flow. Steve Ehrlich, CEO of Voyager, a cryptocurrency trading service, thinks that per-contract fees should disappear too. "The best-kept secret in brokerage is how profitable PFOF [payment for order flow] is on options contracts," he states, adding, "There is a cost of capital on options but that will also be 0 soon."
Ehrlich expects these rate wars to drive a merger between TD Ameritrade and E*TRADE, or that existing brokerage firms buy up some registered investment advisories in order to add to their assets under management.
How Will Online Brokers Stay In Business?
What's next? We expect trading commissions to be completely eliminated at most online brokers. A recently-launched brokerage, dough, charges a $1 per month subscription fee and will not charge any commissions for stock, ETF or options trades. Interactive Brokers announced a limited zero-commission offering, IBKR Lite, which will launch later this month. Robinhood has offered zero-commission trading for 5 years.
Research and data come at a cost to the brokers themselves, and none of these firms are running charities. We would expect to see amenities offered to clients based on their asset level, or possibly their trading activity. Brokers generate revenue in a variety of creative ways, which range from earning interest on your cash balances, loaning out your stock to short sellers, payment for order flow, and trading against you from their own inventory. They also make money off fixed income transactions, and those that manage their own mutual funds and ETFs generate management fees.
Did Robinhood Start This?
Numerous traders on social media platforms are giving Robinhood credit for some commissions dropping to zero, but if that was the case, it would have happened years ago. Robinhood made a splash because it came out with free trades and an easy-to-use mobile app that appeals to new investors, who were not aware of the previous history. There are serious limits to what Robinhood offers traders with larger portfolios, though. All competitive online brokers and robo-advisors have built great technology and investing platforms now, and now that 'free' is the new normal, Robinhood loses its main competitive advantage.
Eliminating trading fees doesn't eliminate fear. Fear and lack of financial education is the greatest barrier to new investors, as we learned in our recent Affluent Millennial Investing Survey. Saving $5 on a $20,000 transaction isn't much of an incentive when you give up price improvement, top-level research, and reasonable interest rates on idle cash.