Cost of trading?

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par_putt
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Cost of trading?

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Schwab's Move to End Trading Commissions Could Slash TD Ameritrade and E*Trade Earnings -- Barrons.com
Dow Jones NewswiresOctober 01, 2019

Charles Schwab's surprise move Tuesday to cut online trade commissions on stocks, exchange-traded funds, and options to zero could depress the annual earnings of rivals TD Ameritrade Holdingand E*Trade Financial both by 22% if they match Schwab's action, according to Keefe, Bruyette & Woods.
The Schwab bombshell hit the online brokerage sector as investors anticipated that competitors could be forced to follow Schwab's lead or risk losing market share. TD Ameritrade, which gets the largest portion of its revenues from trading commission in the trio, declined the most on Tuesday, falling nearly 26% to $34.67. E*Trade was down 16% to $ 36.51.

Both TD Ameritrade and E*Trade hit new 52-week lows Tuesday and now trade for around nine times projected 2019 earnings. The pair is each expected to earn about $4 a share this year. TD Ameritradeyields 3.5% and E*Trade yields 1.5%.

The potential earnings hits to TD Ameritrade and E*Trade help explain the outsize market reactions Tuesday.

KBW analysts Kyle Voigt and Matthew Moon estimated in a note Tuesday that TD Ameritrade's (ticker: AMTD) fiscal 2021 earnings could drop to $3.09 a share from the firm's current estimate of $3.95 if TD Ameritrade fully matches the Schwab (SCHW) commission cuts. For E*Trade (EFTC), the fiscal 2021 earnings could fall to $3.06 a share from $3.90 in the zero-commission scenario.

Schwab shares dropped almost 10% to $37.76 Tuesday and now yields 1.8%. The KBW analysts projected that Schwab's 2021 earnings could drop to $2.39 a share from $2.58 given its action Tuesday, a 7% drop.

Schwab is less exposed to commission revenue than its online brokerage rivals, which may have helped prompt its move to lower commissions. Schwab estimated that its action would depress its quarterly revenues somewhere between $90 million to $100 million -- about half its trading revenue, but just 3% to 4% of its total revenue.


In a statement, Schwab Chief Financial Officer Peter Crawford called the action "the right thing to do for clients, removing one of the last remaining barriers to making investing accessible to everyone and continuing our tradition of challenging the status quo on behalf of individual investors."
The KBW analysts also included in their earnings analysis for TD Ameritrade and E*Trade less severe scenarios in which they cut commission rates by $2 and $4 per trade.

"It is important to note that ETFC and AMTD had priced their base commission rates on equities, ETFs, and options above that of SCHW (ETFC's active trader, in-line), so it is possible that these companies would not necessarily move pricing down to zero. ETFC & AMTD could also better re-segment its client base, disaggregating active and less-active retail traders and adjust pricing accordingly," the analysts wrote.

Wells Fargo banking analyst Mike Mayo wrote in a client note Tuesday that he expects little impact from the Schwab move on the five big banks he follows: Citigroup (C), JPMorgan Chase (JPM), Bank of America(BAC), Morgan Stanley (MS), and Goldman Sachs Group (GS).

"The impact on the 5 large US global wholesale banks...should not be material. While online retail trading commissions are not disclosed for any of these 5 banks, we estimate that the average earnings impact is less than 1%," Mayo wrote.

He added that the "bigger point is that the idea of a business model based on trading commissions is very much a last century idea in a period when each one of these 5 banks looks to build more complete relationships and add more value than based on the mere price of a stock trade."

Morgan Stanley was the biggest loser Tuesday among the five, dropping 3% to $41.38. It has the most exposure among its peers to retail brokerage. Bank of America, which owns Merrill Lynch, was off 2.5% to $28.44. JPMorgan and Goldman Sachs were down about 2%. Wells Fargo (WFC), which also has a retail brokerage platform, was down alomst 3% Tuesday, to $49.06.

Write to Andrew Bary at andrew.bary@barrons.com
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