Charles Schwab Cuts Commissions, Stock Tanks

Investors are less than impressed by Charles Schwab’s move to cut online-trading commissions.

Charles Schwab announced via a press release on Tuesday that it’s eliminating commissions for stocks, options, and ETFs listed on U.S. and Canadian stock exchanges. Clients who trade options will continue to pay 65 cents per contract.

Charles Schwab stock fell about 8% on the news … Investors are concerned that this move will impact the company’s bottom line.

This move comes in the ongoing battle of brokers offering competitive fees and commissions. Brokers like Charles Schwab have to lower fees to compete. The startup Robinhood started offering fee-free stock trading in 2013.

“This is our price. Not a promotion. No catches. Period. Price should never be a barrier to investing for anyone, whether an experienced investor or someone just starting on the investing path,” CEO and president Walt Bettinger said in the press release.

Competition Is Also Falling…

Charles Schwab competitor Interactive Brokers also announced plans to offer commission-free online trading last week. This news knocked shares of Charles Schwab, TD Ameritrade, and E-Trade lower.

Now, on the news that Charles Schwab will also offer commission-free trading, TD Ameritrade shares dropped by over 20%. E-Trade shares fell by over 18%.

In a note to clients, Devin Ryan of JMP Securities said, “Free trading isn’t a new theme in the industry, but the cadence of announcements from firms offering zero commission trades seems to be picking up, and we also note that many of these companies have more credible platforms (and capital behind them) than the offerings of the past.”

J.P. Morgan Chase recently revealed its own free trading app. That’s just one more major broker slashing trading fees.

Press Release Details

“From day one, my passion has been to make investing easier and more affordable for everyone. Beginning October 7, every Schwab client can trade U.S. stocks, ETFs and options commission-free. Eliminating commissions ensures my ultimate vision is realized – making investing accessible to all,” said founder and chairman Charles Schwab in the announcement.

Starting October 7, the online commission fee for U.S. stocks, ETFs, and options will drop from $4.95 to zero. The company also stated that there’s no required account minimum account to open a full-featured brokerage account.

Every current client using their Charles Schwab account via web or mobile qualifies for this new pricing. There’s no need to open a new account, make a new deposit, or maintain a minimum balance.

Impact on Quarterly Revenue

But the new commission-free pricing structure has investors concerned that Charles Schwab’s revenue will take a major hit.

In a separate press release, CFO Peter Crawford offered his own commentary on this announcement. Crawford indicated that the reduced pricing could cost the company about $90–$100 million in quarterly revenue. But, he continues, “commissions per revenue trade (CPRT) have been falling for multiple years, so the potential revenue impact in coming quarters could very well be smaller, holding all else equal.”

Last time the company reduced its commission fees, assets under management grew to $3.72 trillion. Charles Schwab hopes it can replicate this asset growth to make up for lost revenue under this new commission-free pricing structure.

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