2019-10-14 Bloomberg Businessweek-Europe Edition

F I N A N C E

3

26

Edited by

Pat Regnier

BloombergBusinessweek October 14, 2019

The Day Trading

Commissions Died

● Bigonlinebrokershavecut

themtozero.Theydon’tneed

themtomakemoneyfromyou

Fromsharingpicturestosendingemailtostreaming

videos,we’reallusedtotheideathatmanyofthe

thingswedoonlinearefree.Wealsoknowthat

noneofthosethingsarereallyfree—FacebookInc.,

Google,andotherinternetcompanieshaveplenty

ofwaystomakemoneyoffofusoncewesignup.

Nowanotherindustryhasadoptedthisbusiness

model:onlinestockbrokers.

OnOct.1, Schwabsaidit wouldcutcommissions

ontradesforstocksandexchange-tradedfundsto

zero,followedonthesamedaybyTDAmeritrade

andETradethedayafter.It wasthelogicalendpoint

ofa decades-longbrokeragepricewarthatbegan

whentheU.S.SecuritiesActsAmendmentsof 1975

endedfixedtradecommissions.Somebrokerages

tookthatopportunitytoincreasetheirfees,buta

formernewsletterwriternamedCharlesSchwab

chargeda comparativelyaffordable$70a trade.The

discountbrokeragebusinesswasborn,andastech-

nologygotbetterandcompetitiongrewmorefierce,

thecommonpricepointskeptfalling—toabout$13

a tradein2005,then$5bythisyear.

Someplayershadalreadygottentofree.For

a few years,the mobileapp-basedbrokerage

RobinhoodMarketsInc.hasofferednotonlyfree

tradesbutalsoa $0minimumbalanceasa way

todrawinmillennialinvestors.Andbigfinancial-

servicescompanieshavebeencrankingoutother

kindoffreeoffers.In2018,FidelityInvestmentsInc.

initiatedindexfundswithzerofees,andJPMorgan

Chase& Co.rolledouta servicethatofferedcli-

ents 100 commission-freestockandETFtradesin

theirfirstyear.InFebruary,CharlesSchwabCorp.

andFidelityannouncedduelingplanstoexpand

commission-free trades on some ETFs. Then on

Sept. 26, Interactive Brokers Group Inc. intro-

duced a service with commission-free trading on

U.S. stocks and ETFs called IBKR Lite.

Investors in brokerage stocks have been rattled

bythelatestpricecuts,andthesharepricesof

Schwab,TDAmeritrade,ETrade,andInteractive

allfell.Schwabstandstoloseabout$400million

in yearly revenue from eliminating commissions.

Which raises the question for customers: Why are

the brokers willing to take such a big hit to give

me free stuff? “Let’s look at this from a business

and economic perspective,” says Peter Lazaroff,

co-chief investment officer at Plancorp LLC, a reg-

isteredinvestmentadviser.“Iftherearenocosts

fora productyouuse,thenyouarenolongerthe

customer—you just became the product.”

That’s a common one-liner about internet media

companies these days. Charles Schwab—the man,

notthecompany—doesn’tshyfromsuchcompar-

isonstotech’sfreebie-drivenapproach.Asearly

as 15 years ago, he says, he began musing about a

seemingly wild decision to bring commission rates

to zero. “I’ve always tracked Google,” says Schwab,

who’s chairman of the brokerage. “Google made

the concept of using the internet as the backbone

of what you do. You offer the primary service on

a free basis and hope to attract enough business,

enough clients, that you figure out different ways

to make some revenue.”

Unlike internet giants, brokers aren’t chasing

eyeballs and personal data. It’s the clients’ money

they’re after.

One of the greatest sources of revenue for bro-

kers is to invest or loan out the money clients

don’t have in play in the market. It works like this:

Schwab and other firms “sweep” the uninvested

cash in clients’ accounts and place it in one of their

banking subsidiaries. They pay customers inter-

est on the money, but it’s nothing to write home

about—Schwab’scurrentratesareaslowas0.12%

forsmallbalancesand0.5%foraccountswith

$1million or more. Higher rates are available in

other savings accounts and money-market mutual

funds, including those sold by the brokers, but

access to the cash may not be as convenient for an

investor just waiting for an opportunity to put the

funds to work in the stockmarket.

This idle cash can addup.Schwabclients’

accounts total about $3.7trillion, according to