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Fidelity Cuts Trading Prices, and Schwab Follows

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A price war has erupted among discount brokers, joining a war already underway among index mutual funds and ETFs. Less than a month after Schwab cut commissions $2 to $6.95 a trade, Fidelity Investments announced a $3 drop to $4.95 per trade early Tuesday and within hours Schwab matched it.

Fidelity and Schwab also lowered options prices from 75 cents to 65 cents per contract. In addition, Fidelity reduced its margin rate on balances of $500,000 or more to 4%.

“With these unprecedented price cuts, Fidelity is continuing to transform the brokerage industry, bringing the best value to retail clients,” said Ram Subramaniam, president of Fidelity’s retail broker business, in a statement. “Our active trader clients who make hundreds of trades each year will particularly benefit from our dramatic prices reductions, and all clients who trade will be able to keep more money in their pockets.”

Hours later Schwab CEO Walt Bettinger said in a statement, “We never want commission costs to be a barrier for investors deciding which firm can best serve their needs.”

Bettinger went on to note that that the cost of the firm’s industry-leading low-cost S&P index mutual fund is nearly five times less than Vanguard’s and three times less than Fidelity’s.

(Related on ThinkAdvisor: Schwab Cuts Online Trading Costs, Index Mutual Fund Expenses)

Schwab had cut mutual fund and ETF fees in early February, along with trading commissions, reducing expenses to 0.03% for its S&P index Fund, to 0.06% for its Small-cap Index fund and to 0.04% for its Aggregate Bond Index Fund – all below costs for equivalent funds from Fidelity and Vanguard, which, except for the Fidelity 500 index Fund were in double digits.

(Related on ThinkAdvisor: Vanguard Cuts ETF Fees as Race-to-Zero With BlackRock Heats Up)

Then last Friday, Vanguard cut expenses on 68 mutual fund and ETF shares, marking its third price cut in as many months following cuts by State Street Corp. and BlackRock.

Kyle Voigt, analyst at Keefe Bruyette & Woods, wrote in a comment that Schwab’s “swift reaction” to Fidelity’s move “was a clear message that it will match on pricing if Fidelity cuts again.” He added, “Investors will have to wait and see if Fidelity responds again to SCHW but that would likely be pure value destruction given the swift reaction and messaging by SCHW today.”

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Voigt wrote he was “encouraged” by phrasing in today’s Wall Street Journal by Fidelity’s Subramaniam that price cuts were a “big and dramatic” change and “long-term move” for the firm.

Following Fidelity’s announcement  Dick Bove, financial analyst at Rafferty Capital Markets, told ThinkAdvisor that Fidelity’s price cut “reflects the fact the cost of doing business in the brokerage industry has dropped dramatically due to automation and firms are now passing along those savings to their customers.”

Traditional mutual fund companies, like Fidelity, need to attract new customers because money is pouring into ETFs and leaving mutual funds, said Bove.

Asked whether price cuts will work to attract new customers, Bove said they “don’t work in general to increase business. What increases business is if performance of funds start to skyrocket. That would increase demand to do more business with Fidelity,” said Bove.

In afternoon trading today, Schwab shares were down about 4% from the previous close, but shares of TD Ameritrade were off more than 10% and shares of E*Trade were down more than 8%.

Voigt doesn’t expect TD Ameritrade or E-Trade will match today’s price cuts by Schwab or Fidelity before the dust settles and they assess whether more price moves will come from competitors. “Neither was a cost leader previously, and we don’t expect either to be in the future.”

Fidelity and Schwab are now the lowest cost brokers for U.S. equity and options trades. TD Ameritrade and E*Trade currently charge $9.99 per trade and 75 cents for options pricing.

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