US brokerage Schwab scraps trading commission

Power gencos' dues on discoms rise 57% in Aug

The outstanding dues owed by distribution utilities to power producers rose around 57 per cent to Rs 78,020 crore in August 2019 compared to the same month last year, reflecting the growing stress in the sector. Discoms owed a total of Rs 49,669 crore to power generation companies in August 2018, according to web portal and app namely, PRAAPTI . Not too long ago, Charles Schwab Corp. helped to usher in the golden age of low-cost, online stock trading.

Now, the brokerage may help to kill off the fee-based business model altogether.

On Tuesday, Schwab said it will eliminate commissions on trades for all US stocks and exchange traded funds. The announcement—which was quickly matched by rival TD Ameritrade Holding Corp. after markets closed -- sent shock waves across Wall Street. Shares of E*Trade Financial Corp. slumped 16 per cent, while TD Ameritrade lost more than a quarter of its stock market value. Schwab's share price also took a hit, tumbling nearly 10 per cent.

The gambit is just the latest in an intensifying, industry-wide war over fees for everything from stock trades to index funds and financial advice. And it's squeezing not only the likes of Schwab, but also BlackRock Inc. and Fidelity Investments. These types of aggressive price cuts -admittedly a small boon for ordinary Americans routinely nickel-and-dimed by financial firms -- have some observers wondering whether anyone can win in a business where more and more services are handed out for free.

For Schwab, it's a bold, but risky move. The firm, which relies less on trading commissions than its competitors, is betting it can offset any decline of revenue by attracting more clients. It can then use their assets to generate interest income, an essential feature of its business that's come under pressure recently as interest rates have declined.

"Maybe because of the inception and growth spurt of online brokers during the dot-com boom, there's a romanticization of the individual trader," said Michael Wong, an Analyst at Morningstar Inc. "There's still a mindset among the investing public around the importance of commissions," which is less important to Schwab.

While trading costs have declined across the board, Schwab comes from a position of relative strength. The firm takes in just 7 per cent of its net revenue from commissions. That's far less than Interactive Brokers Group Inc. or TD Ameritrade, which collect more than a from trading fees.

Schwab estimated it could lose up to $400 million in revenue a year from its zero-fee offering. Wong said that in the current rate environment, the firm would need roughly $20 billion or more in new deposits to offset that loss. Currently, over half of Schwab's net revenue comes from interest earned on its assets. The firm, which oversaw $3.72 trillion as of August 31, took in almost $20 billion in net new assets that month.

Schwab last cut its trading commissions in February 2017, when it reduced them to $4.95 per both third trade from $6.95 to match Fidelity. Since then, assets at the firm have grown by about $800 billion from a combination of market gains and net new inflows.

Nevertheless, the company is looking for ways to reduce costs internally. Last month, Schwab said it would cut 600 jobs, or about 3 per cent of its workforce, because of the "increasingly challenging economic environment."

Schwab's latest move builds on an increasingly aggressive, slash-and-burn approach to price reductions.

Late Tuesday, TD Ameritrade said it would match Schwab's no-fee trading offer at a cost of as much as $240 million a quarter, or roughly 16% of its net revenue. Interactive Brokers announced last week it would provide free trades. And in recent months, Fidelity, Vanguard Group and JPMorgan Chase & Co. have taken steps to eliminate fees and commissions on some offerings.

According to Schwab Chief Financial Officer Peter Crawford, zero commissions are an inevitable industry trend. Schwab is just trying to get ahead of that."We are seeing new firms trying to enter our market— using zero or low equity commissions as a lever," Crawford wrote.

—Bloomberg