What’s Going On Here?
Reports surfaced last week that US brokerage Charles Schwab might tempt TD Ameritrade to join its side with a $26 billion takeover bid – after having wounded its competitor beyond repair (tweet this).
What Does This Mean?
Schwab shot first by ditching commissions on its stock trading services in an effort to compete with startup Robinhood. And seeing as Schwab made just 7% of its revenue from those commissions last year, it could afford to take the hit (though its stock did fall 10%). The same couldn’t be said for TD Ameritrade, which earns over a third of its revenue from commissions. But forced to stay competitive, TD Ameritrade had no choice but to cut its commissions too – and its stock fell 25%.
Schwab’s now reportedly thinking about snapping up its wounded foe for a bargain. Schwab would benefit from the added heft: it needs scale to compete in the new, low-fee environment, and the combined entity would manage $5 trillion in assets. Meanwhile, investors in the firms’ smaller rival, E*TRADE, are trembling: its stock fell 10% on word of the deal.
Why Should I Care?
For markets: Squeezed on all sides.
Both Schwab and TD Ameritrade make most of their money from “net interest income”. In other words, they get paid interest on any cash kept in your portfolio. With no trading commissions, that income will become even more important. The timing’s pretty terrible: with interest rates ultra-low, cash isn’t very profitable to brokers. But it could be worse: last week, a German bank started charging negative interest, making retail customers pay for the privilege of saving cash.
For you personally: Don’t look a gift horse in the mouth.
Zero-commission trading will probably save you money – but just because you can trade for free doesn’t mean you should. Trading more frequently can be hazardous: more chances to make a bad decision risks your returns. Perhaps there’s something to be said for the good ol’ fashioned strategy of letting your investments be.
