Charles Schwab slashes stock trading fees to $0. Then its shares fell 10%

Wednesday, October 2, 2019 by Robinhood Snacks | Disclosures

Big summer blowout... Stock trading is 100% off. Online broker Charles Schwab will stop charging $4.95 on stock, options, and ETF trades starting Oct 7th. But the commission-free announcement dropped Chuck's shares 10% — and rival E-Trade fell 14% and TD Ameritrade plummeted 26%. Here's the percentage of all their revenues that come from trade commissions:

  • E-Trade = 16%
  • TD Ameritrade = 25%
  • Charles Schwab = 7% — Chuck's more diversified in how it makes money, so killing a revenue source won't sting as badly.

Back in the day... buying a stock meant yelling into phones and paying a fee that might cost you more than the stock itself. Chuck is betting that sacrificing short-term revenue (the $4.95 it makes today for each trade) will win customer love and make more money long-term. But here's our Snackable history of stock trading fees:

  • $49/trade: That was the average trading commission in 1975, when Chuck launched its discount brokerage.
  • $10/trade: The average commission dropped by 2015, triggered by Robinhood's commission-free trading app, which launched in 2013 (full disclosure: Robinhood Snacks... is owned by Robinhood).

This is now a price war... and price wars destroy profits. Once a large company starts slashing prices, it can become a price competition among rivals that ends at rock-bottom prices (customers love it. Competition is good.). E-Trade and TD Ameritrade shares fell Tuesday because now they're pressured to join the commission-free battle, too — everyone's profits get wounded in this war.