Schwab Offers No-Commission Trading, Others Follow

Schwab Cuts Commissions, TD Ameritrade Follows

Decades ago, Schwab led the revolution of reducing commissions on trades. High-tech startups, led by Robinhood, are now eliminating commissions altogether. Interactive Brokers slashed commissions on U.S. stocks and ETFs to zero last week. Schwab has responded in kind by announcing that it will cut all commissions on trades of U.S. stocks, ETFs, and options on October 7. TD Ameritrade and ETrade have both followed suit and cut the same commissions. The move rattled the prices of these companies’ shares. Schwab’s and Interactive Brokers’ share prices both fell over 9%, and TD Ameritrade’s, which relies more heavily on commission revenue, fell 25.8%. ETrade, who has kept commissions steady, saw its share price drop 17% on the day of the Schwab announcement.

Pioneered by FinTech Start-Ups Commission Free Trading is Taking Over

Robinhood launched its commission-free trading platform to the public in 2014. Other early adopters were in the fintech space. SoFi and M1 Finance offer unlimited commission-free trading, as does Wealthsimple but only to Canadian consumers.  Stash has commission-free trades on fractional shares but requires a monthly subscription fee. As these companies disrupted the industry, larger players have been forced to adapt. 

JP Morgan Chase’s You Invest, launched in 2018, gave 100 commission-free trades in the first year to new users. Clients who also used other Chase products could qualify for up to 100 commission free-trades per year. In September, Ally Financial announced users could trade over 500 ETFs commission-free for 90 days. Schwab, TD Ameritrade, and Interactive Brokers have fully embraced commission-free trading for U.S. stocks and ETFs. 

No Commission Doesn’t Mean No Cost

While commission-free trading is certainly a positive for investors, it does not mean that the platform carrying out the trade does not generate revenue from doing so. These platforms can make money in a variety of ways, including payment for order flow and interest on cash deposits. Payment for order flow involves brokers directing orders to third parties, who then pay the broker for orchestrating the transaction. When this happens, users may not be paying a direct fee but may experience less favorable trade prices. The platforms can also earn interest on idle cash sitting in an investor’s account. 

Future of Commissions

Commissions have been coming down for decades and now, suddenly, have dropped to zero at the largest discount brokers. Given the rise in pricing pressure from fintech companies and now the industry leaders, it appears as if other platforms will have to join the zero-commission trend. This represents a paradigm shift in the industry. The impact on companies, as evidenced by significant drops in share prices, will be felt immediately, and they will be forced to adapt their business models in an environment that is becoming ever more friendly to the individual investor. Between low-cost automated advisors and now free trading across major brokers, access to financial markets has never been so widespread.