Who is Winning the First Round of Commission-Free Trading?

Back in the olden days, say September 2019, brokers reported their customer activity as “daily average revenue trades” or DARTs. DARTs were a generally accepted metric in the brokerage industry that measured the number of trades per day that generated revenue for the broker through commissions, fees, or a piece of the spread between the bid and ask price. In October, an impressive list of brokers cut their equity commissions to zero. Are they still generating revenue? How is trade activity measured now? And who appears to be the winner based on the first month of free trades?

While examining the trade activity for Schwab, E*TRADE, TD Ameritrade and Interactive Brokers, we noticed that, as usual, it’s not easy to create a direct comparison. E*TRADE, for example, changed the definition of what it considers a trade. Schwab reports weekly trading statistics, rather than the monthly numbers reported by the others. 

Changing Definition of DARTs

Richard Repetto, an analyst with Sandler O’Neill, says, “E*TRADE expanded their definition of a DART to include any customer trades that generate a commission and/or payment for order flow (PFOF).” This expanded definition now includes no transaction fee mutual funds, options trades including those generated by their dime buyback programs and all exchange-traded fund (ETF) transactions. Repetto notes that in October, E*TRADE increased DARTs by 3% and option DARTs by 2%.

During a similar period, Charles Schwab maintained their previous definition of DART, where it needs to generate a commission and saw their October DARTs drop dramatically with its zero commission trade offering in starting October 7. In Schwab’s weekly reports, the number of trades that did not generate a commission are displayed, which doubled from 39% of total transactions for the four weeks ending October 4, 2019, to 78% for the first four weeks of zero-commission trades, ending November 1, 2019.

A decline in the number of revenue-generating trades was expected, said Schwab’s Mayura Hooper, vice president of corporate reputation. Schwab also reports trades that come from asset-based pricing relationships, which is the bucket for the firm’s managed accounts, including their robo-advisory services. 

A Focus on Gathering Assets

The focus for all of the brokers offering free trades is gathering assets. A major contributor to income for any brokerage is revenue generated by earning interest on client cash balances. You can earn interest on your cash if you pay attention to where it is parked, but the broker is making even more. 

A bigger win for Schwab was the inflow of assets during the month of October 2019, which roughly doubled from previous months. Net new assets shows how many new accounts were opened with Schwab, plus additional new deposits made by existing clients, though Schwab’s October figures include $11.1 billion from a mutual fund clearing services client. In spite of that mystery $11.1 billion, an additional 142,000 new accounts were opened, up 7% from October 2018. Web logins also increased 22% from the previous year. 

Schwab reported that client assets stood at $3.85 billion at the end of October, of which 11.3%, or $424 million, is held in cash. That cash is what fuels Schwab’s revenue, and has since before the advent of zero-commission trades.  

TD Ameritrade’s trading figures ticked up from an average of 810,000 per day in September to 897,000 per day in October. The firm did not separate out the trades that generated revenue from the free trades. Merrill Edge does not publish trading statistics, though the firm has said that it expects that more than 90% of all equity transactions will be commission-free since it launched its latest rewards program in October. Fidelity, which is privately held, also does not publish trading statistics.

Other Ways Brokers Make Money

Brokers also generate revenue by loaning out shares of stock held by clients to others who want to sell that stock short, a process called share lending or stock loans. Some brokers, including Interactive Brokers and Fidelity, split the revenue made from share lending with the owner of record of the stock, but most keep it to themselves. In addition, brokers can generate income through payment for order flow, in which market makers offer a small fee per share for the opportunity to process a transaction. But increasing trading velocity does not appear to be the major driver of offering $0 commissions since brokers make so much money on idle cash.

Though it’s difficult to declare a winner of this first month of zero-commission equity trading, the statistics available show that Schwab has succeeded in gathering net new assets at a rapid pace.