The EconomistNovember 30th 2019 Finance & economics 651T
he pricewar was swift and brutal, last-
ing less than eight weeks. On October
1st Charles Schwab said it would no longer
charge retail customers for trading shares,
exchange-traded funds or options online,
forgoing $4.95 a trade. The share price of
America’s biggest discount broker dropped
by nearly a tenth. That of its big rival, td
Ameritrade, suffered more, plunging by a
quarter (see chart). tdAmeritrade followed
in eliminating commissions two days lat-
er. It had little choice, though it reckoned
the move would cut its revenue by
$220m-240m a quarter, or 15-16%.
On November 25th came a truce, and
surrender: Schwab agreed to buy tdAmeri-
trade for $26bn in shares. The deal com-
bines Schwab’s 12.1m brokerage accounts
with tdAmeritrade’s 12m. It will unite two
platforms used by independent financial
advisers—7,500 on Schwab’s, 7,000 on td
Ameritrade’s—for trading, market infor-
mation and regulatory updates.
Investors in both companies will be re-
lieved. On November 21st, when it was first
reported that a deal was imminent, td
Ameritrade’s shares jumped by almost 17%
and Schwab’s by 7.3%. Yet the takeover is as
much a sign of the strains on big brokers as
a demonstration of their market clout.
Founded in 1971, Schwab became a thorn
in the sides of established stockbrokers
after America’s regulators abolished fixed
commissions in 1975. Ameritrade was
founded the same year. In the 1990s, by
then joined by E*Trade, a smaller rival, the
upstarts ventured online. Ameritrade
joined forces with tdWaterhouse, the dis-
count-broking arm of Canada’s Toronto-
Dominion Bank, in 2006.
But in recent years digital technology
has enabled an even cheaper, wholly digi-
tal, discount-broking model. The most
prominent exponent is Robinhood, a six-
year-old Silicon Valley startup, which
boasts 6m clients and charges nothing for
trades. It makes money from payments
from marketmakers to whom it sends
trades for execution, interest from cash in
clients’ accounts, charging for premium
services and lending stocks on margin. It
has also applied for a banking licence.
Schwab could not go on charging $4.95
a pop. Still less could tdAmeritrade keep
asking $6.95. Admittedly, both have more
strings to their bows than execution. They
have their adviser platforms; they hold a
combined $5trn-plus in client assets;
Schwab owns a bank with $208bn in assets.
But no one expects the combined firm to
start charging again for online trades.
To stay competitive, the established dis-
count brokers will have to drive costs
down, spread those costs over a broader
base and spend more on technology. Chris-
topher Harris, an analyst at Wells Fargo, es-
timates that in past takeovers of discount
brokers, cost savings have amounted to
50% of the target’s expense base. Schwab
and td Ameritrade expect to save
$1.8bn-2bn a year, about two-thirds of td
Ameritrade’s operating costs.
As elsewhere in finance, the biggest are
likeliest to endure. They can afford to
spend oodles on technology and to main-
tain branches as a national branding pres-
ence. And when margins are wafer-thin,
volume is king. The importance of scale
may help to explain why E*Trade’s share
price fell by more than 9% on the day news
broke of its rivals’ probable tie-up. It had
also been buoyed by a takeover premium;
now E*Trade looks a little lonely.
America’s antitrust authorities are cer-
tain to scrutinise a deal between the two
biggest discount brokers. Whether they
will block it, says Matthias Memminger of
Bain, a consulting firm, is less sure. Ameri-
cans buying and selling shares have plenty
of choice. They can invest, for example, us-
ing Fidelity or Vanguard, two mighty asset-
managers that push their own funds, or
through their tied advisers. Banks’ broking
divisions are also keen for their custom.
And Schwab and tdAmeritrade will doubt-
less argue that they have fintechs to look
out for too. If they didn’t, they would have
had less of an urge to merge. 7America’s biggest discount brokers tie up to bulk up
Schwab and TD Ameritrade
Going for broker
E*TradeTD AmeritradeCharles SchwabSchwab swingsSource: Datastream from RefinitivShare prices, September 30th 2019=100Sep Oct Nov
20196080100120O
n november 25th China National Ra-
dio launched a mini-series to laud
President Xi Jinping’s stewardship of the
economy. For a state broadcaster, that
might sound perfectly normal. But the
theme of its first report was neither China’s
stellar growth nor its sparkling innova-
tions. Rather than such standard fare for
propagandists, it focused on creditor com-
mittees, which aim to restructure compa-
nies that have run into financial difficul-
ties. It was the latest sign of China’s rapid
shift from denying that it had a debt pro-
blem just a few years ago to grappling with
it publicly.
The bond market bears out the change.
It was only in 2014 that China experienced
its first default on a domestically traded
bond. In 2018 defaults hit 117bn yuan
($16.5bn), triple the previous high. This
year defaults are on track to reach roughly
the same value. About 1% of all issuers de-
faulted in the first three quarters of this
year, just a little below the global level, ac-
cording to Fitch, a ratings agency. Bond de-
faults, says s&p Global, another ratings
company, are “becoming a norm”.
China’s central bank has tried to convey
the message that this new norm is healthy.
In its annual financial-stability report,
published on November 25th, it said that
the rise in defaults reflected the market’s
maturation. As investors become more
sensitive to risk, it added, they will steer
capital towards more deserving firms,
making for a stronger economy.
The central bank is right—up to a point.
Defaults are part of any efficient bond mar-
ket. The problem for China is that theSHANGHAI
Rising defaults may be a sign of a
healthier marketChinese bonds