Wall Street is in a race to the bottom. On Tuesday, Charles Schwab said it will slash its commissions for online trades to zero in response to looming competition from app-based upstarts like Robinhood.
The brokerage firm's stock was down 10% in the afternoon. Its competitors took a bigger hit, with TD Ameritrade shares falling 25% and E-Trade down about 17%. In its announcement, Schwab said eliminating online trading commissions equates to about $90 million to $100 million in quarterly revenue, or about 3% to 4% of revenue.
Schwab is bringing its online trading commission down for U.S. and Canadian equities and exchange-traded funds from $4.95 to zero starting next Monday. The firm already offers commission-free trades on hundreds of ETFs.
"It's the right thing to do for clients, removing one of the last remaining barriers to making investing accessible to everyone and continuing our tradition of challenging the status quo on behalf of individual investors," Chief Financial Officer Peter Crawford said in the announcement.
He also cited competition from both traditional e-brokers and new firms in the market.
These newer firms, including Robinhood and Acorns, market themselves with commission-free or low-cost investing and are often mobile-friendly and aimed at younger people. Crawford said Schwab isn't feeling pressure from them yet, but didn't want to wait too long to respond.
"It has seemed inevitable that commissions would head towards zero, so why wait?" he said.
TD Ameritrade and E-Trade charge $6.95 for online trades. And JPMorgan Chase offers 100 free trades in a customer's first year.
It's unclear if TD Ameritrade will match Schwab dive to zero. In an email, spokeswoman Becky Niiya said the news just came out, but her firm will remain competitive.
A representative from E-Trade couldn't be reached for comment.
Devin Ryan, an analyst at JMP Securities, predicted Schwab's competitors will eventually respond, given the pressure their shares are under, but Ameritrade and E-Trade would lose revenue if they match Schwab.
In a note to clients, Ryan said the brokerage industry is entering a new commission price war as free trading becomes the norm.
He said eliminating commissions will be manageable for Schwab.
"Given Schwab's stated focus that price does matter and its roots as a low-cost provider, we think this decision was an inevitability over time as the company does not want to be in the minority in charging customers for trading," Ryan wrote.
Editor's note: Charles Schwab & Co. is one of NPR's financial sponsors.
Peter Talbot is an intern on the NPR Business Desk.
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