Don't celebrate just yet.
The elimination of trading commissions for stocks, ETFs and options at Schwab and TD Ameritrade, and now E-Trade, is being touted as great news for investors, but the outcome may be more mixed.
Both Schwab and TD Ameritrade admit that these free trades will reduce revenues — 3%-4% of net annual revenues for Schwab, 15%-16% of net revenues for TD Ameritrade and about $75 million per quarter on a pro forma basis for eTrade — which probably explains the negative reaction on Wall Street.
Schwab, TD Ameritrade and eTrade shares all fell sharply on Monday following the Schwab announcement, even though TD Ameritrade didn't announce the cut until after the market close and eTrade hadn't announced any change yet, and they were down slightly more than the broader market on Wednesday.
The question now is how will brokerages who trashed commissions make up for the loss in revenues? And how will those moves affect investors?
Nicholas Colas, Co-founder of DataTrek Research, expects more consolidation in the retail brokerage industry, much like other industries have experienced after "a disruptive shift that makes its products/services cheaper, better, or more responsive to customer needs."
He adds that "retail brokerage firms will have to consider merging in order to maximize economies of scale … [but] scale may not return an industry or its participants back to returns on capital that existed before the disruption came along."
