For a lot of investors, trading fees and commissions have historically been a driving factor in deciding which brokers to use. Commissions have consistently fallen through the years, but the race to zero is now complete, with a wide range of big brokers moving this month to offer zero commission trading on stocks, ETFs and options.
The move resulted in a big hits to broker stocks such as TD Ameritrade and E-Trade. commissions do account for a sizable amount of revenues for brokers, but zero commissions by no means will put any of these companies out of business. The primary reason why this is the case is that these companies also generate huge amounts of revenue from interest income on investments they make with customer deposits. If the move to zero commissions lead to higher customer deposits then the additional interest income could easily make up for the lost commissions.
The real loser in the situation are companies like Robinhood which were already offering zero commission trading. For a lot of investors that were using Robinhood in order to avoid paying commissions, there are now very good reasons to look elsewhere. Bigger brokers have more in-depth research to offer, have built more extensive training programs, and have superior customer service.
If all things are equal in terms of commissions, why would investors not transfer their money to brokers that offer better tools and support? Here are a few brokers that stand to gain from the race to zero commissions.
TD Ameritrade (AMTD)
TD Ameritrade (AMTD) has fallen a little over 30% since the company announced moving to zero commission trading, which is roughly in-line with the revenue the company was making from commissions. With the lower revenue being priced into the stock, AMTD looks pretty attractive for new investors. The company offers a lot of research and support for its clients, which will help it not only keep its current clients, but also pick up new clients that may have done their trading on other platforms previously like Robinhood. TD Ameritrade is known for its easy access to research and above average educational tools. Traders that were previously using zero commission brokers that do not offer the in-depth research and tools that TD Ameritrade offer will now have a very compelling reason to bring their money over to Ameritrade, which will in turn lead to higher interest income from the company on customer deposits.
E-Trade Financial (ETFC)
E-Trade (ETFC) is one of the most recognized brands in the online brokerage space, and with the company now moving to free trading it should manage to attract a lot of traders that have been interested in the company but trading elsewhere for lower commissions. Investors that have been trading on free platforms like Robinhood suddenly have another option. Robinhood has been incredibly successful in attracting traders with their free commissions, but the company was built around free commissions and little more. Now that other avenues have opened for traders the appeal to move to bigger names with more resources and better customer service will quickly start to make up for the lost commissions as companies like E-Trade made more money on interest income than on trading fees and commissions already. E-Trade is able to generate sizable interest income on customer deposits it invests in short-term fixed income investments before needed for trades, so the addition of new accounts in response to free trading could be a major win for the company in the long-term.
Schwab (SCHW)
Charles Schwab (SCHW) stock took a big hit after the company announced it would offer $0 commissions early this month. SCHW was trading around $42 and quickly fell as low as $35 before finding support. The stock bounced nicely after the company topped Q3 estimates on both the top and bottom line, and announced client assets sat at an all-time high of $3.77 trillion at the end of the quarter. Schwab stated that it was removing the fees and commissions on stocks, exchange-traded funds, and options to be more in-line with the company's founding principle of making investing accessible to everyone. Schwab offers fantastic customer service, in-depth research and educational tools that will encourage traders to open new accounts or transfer money into existing accounts from other brokers. Wall Street pushed the stock up over 5% on the earnings and new client asset news.
Interactive Brokers Group, Inc. (IBKR)
Interactive Brokers Group, Inc. (IBKR) launched its free product in late September. The stock was trading around $54 before the news broke and shares quickly pulled back to around $45.50 on the news. IBKR has since recovered a little, and is currently trading at $47.50, down around 12% since the move. The drop in the stock has priced into the lower commission revenues and shares are now trading at a forward P/E of 20. The stock sold off less than other brokers that moved to free commissions because the company continues to offer commission-based trading for more sophisticated traders that like the extras that the company offers. It has a very advanced trading platform; it does not sell its order flow (which in most cases lowers the cost basis enough to cover the commission) and has no account minimums. IBKR has built its business around sophisticated traders, which are more likely to see the value in the company's commission trading versus the zero-commissions options that have become available.
