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.”
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.
“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.