Price war heats up as Schwab lowers stock and ETF commission to $8.95

Brokerage says reduced charge on trades could cut up to $20M from first-quarter earnings

Jan 7, 2010 @ 12:46 pm

By Jed Horowitz

The Charles Schwab Corp. — in a bid to attract more trades from customers who use deep-discount brokerages — plans to lower its commissions on all online stock and non-proprietary ETF transactions to $8.95 per trade.

The reduced commission, which applies only to online trades on stock and non-Schwab ETFs, will take effect Jan. 19.

The move betters the $9.99 across-the-board pricing that competitor TD Ameritrade Holding Corp. has long offered on Internet equity trading. It also brings Schwab closer to the $7 commissions charged by Scottrade for online equity and ETF trades.

Schwab currently charges $12.95 per trade to clients who hold less than $1 million in household assets at the firm or made fewer than 120 trades a year. The brokerage also adds charges for orders over 1,000 shares.

The additional discounts apply to all retail investors, including end clients of the firm's Advisor Services custodial program who receive electronic statements and trade confirmations. Retirement accounts and plan administrator services accounts affiliated with Schwab also qualify for the reduced rate.

The new pricing is aimed at encouraging consolidation of client assets and trades at Schwab, the company said in a statement. But Schwab noted that the program could lower its first-quarter revenue by between $15 million and $20 million

Schwab last summer waived commissions on online trades and reimbursed account transfer fees to new clients brought to its platform by independent advisers through the last six months of 2009. Those fee waivers continue through the end of June 2010.

“With solid profitability and a healthy balance sheet, we are able to pursue our growth opportunities from a position of strength,” Schwab chief financial officer Joseph Martinetto said in the statement.

Schwab late last year introduced six exchange-traded funds on which it has waived online trading commissions for its clients. Schwab today also unveiled a managed ETF portfolio account comprised of exchange-traded funds representing 20 equity and fixed-income asset classes. The new product requires minimum investments of $100,000. It will also be available on Jan. 19. Schwab didn't disclose pricing for the program.

The new $8.95 pricing on online stock and ETF trades does not apply to foreign stock transactions, block transactions of 10,000 or more shares or orders over $500,000, restricted stock transactions that continue to have broker-assisted pricing schedules, or employee-negotiated commissions related to stock compensation programs.

Retail investors who trade by phone will be charged $13.95 per trade under the new program, down from $17.95, while those who rely on Schwab brokers will pay $33.95, down from $37.95. The lower prices on these trades were already available to Schwab clients who made at lest 120 trades a year or kept household balances of at least $1 million with the firm.

Richard Repetto, an analyst at Sandler O'Neill & Partners LP, said Schwab's latest attempt to capture trades from small investors comes at a time when its trading volume has been shrinking. Its daily average revenue from trades fell 2.9% in 2009, while trades at competitors TD Ameritrade and E*Trade rose 11.1% and 3%, respectively, he wrote in a note to clients.

Schwab's new price of $1 a trade undercuts what TD Ameritrade and E*Trade offer active traders or those with high assets, but it's unclear whether that will be enough to attract the active traders that fuel discount brokers' volume machines, Mr. Repetto wrote. "While it could help consolidate wallet share of trades and assets of the ‘little guys' who have accounts at competitors, it's unclear whether $1 per trade … will have an impact on moving the more meaningful customers that aren't at SCHW already," he wrote.

Schwab's new managed-portfolio ETF, he wrote, will compete directly with the TD Ameritrade Amerivest service.

Shares of Schwab and TD Ameritrade, which fell earlier yesterday, recaptured some of the loss by day's end. Schwab shares closed down 6 cents, or 0.3%, at $19.30 while TD Ameritrade fell 65 cents, or 3.3%, to $18.91 on expectations it might have to respond to its competitor's pricing. E*Trade was flat throughout most of the day, and was down 1 cent at $1.79 in after-hours trading.

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