Schwab Broke Ameritrade to Buy It

On Sept. 30 of this year, the stock of discount brokerage firm TD Ameritrade Holding Corp. closed at $46.70 per share, for a market capitalization of about $25.3 billion. The next day it closed at $34.67, down more than 25%. The reason that Ameritrade lost $6.5 billion of market value in one day is that rival discount brokerage Charles Schwab Corp. announced that, instead of charging commissions for stock trades, it would just not do that. The stock trades would be free.

We talked about this decision the next day, and I pointed out that this was not a particularly big loss for Schwab. Last year commissions represented less than 7% of Schwab’s net revenue. Most of Schwab’s money comes from net interest revenue—paying brokerage customers lower rates on their idle cash than it gets by investing that cash—with asset management fees also a big contributor. If you cut commissions to zero, you can (try to) attract more client assets, which means more net interest revenue and more opportunities to sell asset management. It could be a good business decision. On the other hand losing 7% of your revenue is losing 7% of your revenue. All else equal, you’d rather have the extra revenue. And Schwab had to know—everyone knew—that its competitors would cut their commissions to zero to try to keep market share; this is an intensely competitive business, and the main thing that discount brokerages compete on is commissions. Schwab’s stock closed down almost 10% that day, suggesting that loss of commission revenue might outweigh the market-share gains.