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Industry Spotlight > Broker Dealers

The Potential Fallout From JPMorgan's Free Stock Trades Plan

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JPMorgan Chairman & CEO Jamie Dimon (Photo: AP)

JPMorgan’s plans for free stock and ETF trading by self-directed retail investors spell trouble for at least three publicly traded retail brokers.

According to Moody’s Investors Service, the bank’s new pricing model is a credit negative for Charles Schwab, TD Ameritrade and E-Trade — who are “most vulnerable” — because it increases “the pressure to follow with their own commission price reductions or risk losing market share.”

(Related: JPMorgan Offers Free Trades as Fight for Retail Investors Builds)

All three discount brokers reduced trading commissions last year in attempt to stay competitive. After Fidelity slashed commissions to $4.95 per trade, Schwab followed to match the new lower rate, then TD Ameritrade and E-Trade cut commissions to $6.95 per trade.

(Related: Fidelity Cuts Trading Prices, and Schwab Follows)

“Despite this recent price war … commissions still represent a significant revenue stream for retail brokers,” write Moody’s analysts Fadi Abdel Massih and Ana Arsov.

Increasing customer trading volumes and rising short-term rates earned on clients’ uninvested cash balances have offset some of the impact of lower commission on retail brokers, but they “could face credit negative revenue declines … [if] compelled to decrease or eliminate commissions entirely following new pressure from traditional competitors,” according to the Moody’s analysts.

Schwab is the least vulnerable, with commission revenue representing about 7% of second-quarter net revenues, according to Moody’s. TD Ameritrade and  E-Trade rely more heavily on commissions, which accounts for about 27% and 17%, respectively, of their net revenue.

Related: Fidelity Unleashes No-Fee Index Funds)

Pressures have been rising. On Aug. 1, Fidelity introduced two index funds with a zero expense ratio and reduced fees and eliminated minimum investments on 21 additional index funds; last week, Vanguard introduced the largest commission-free ETF platform, with roughly 1,800 funds.

(Related: Vanguard Launches Largest Commission-Free ETF Platform)

In addition, new entrants into the discount brokerage business such as Robinhood Financial also offer commission-free trading, generating revenue from interest earned on uninvested cash balances and margin lending and from payments received directing order flow to market makers and others.

“Now that JPM is leading the charge with more competitive pricing, the retail brokers’ premium may be challenged by their clients, “ write Moody’s analysis.

JPMorgan’s plan is expected to take effect the last week of August, It offers free trades on at least 100 stock or ETF transactions for all self-directed retail accounts for one year and requires a $15,000 minimum account balance thereafter.


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