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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.