By C Nivedita and John McCrank
(Reuters) - Discount brokerage Charles Schwab Corp (N:SCHW) said on Tuesday it is eliminating commissions for online trading of stocks, ETFs and options listed on U.S. or Canadian exchanges.
Schwab's latest move is likely to have a knock-on effect across the sector, forcing rivals to follow suit and eliminate commissions, experts warned.
Shares in rivals TD Ameritrade (O:AMTD) and E*Trade (O:ETFC) slid 22% and 18%, respectively, while Schwab's stock was down 9.7%.
"Certainly sends a salvo to other self-directed firms to follow suit," said Stephen Biggar, director of financial institutions research at Argus Research.
The decision marks an inflection point for online brokers, as newer, nimbler rivals such as Menlo Park, California-based startup brokerage Robinhood have been capturing market share in recent years by offering commission-free stock trades.
The firms are able to offer the free trading by selling their customers' orders to so-called wholesale market makers, such as Citadel Securities and Virtu Financial (O:VIRT), which aim to make a profit on the spread between the bid and the offer on the shares.
This has forced traditional brokerages to follow suit.
Rival Interactive Brokers Group on Monday started offering commission-free, unlimited trades on U.S.-listed stocks and ETFs. And last summer, JPMorgan Chase & Co (N:JPM) also began offering free stock trades for self-managed accounts through its mobile banking app.
"Stocks commissions long ago stopped being a primary revenue item for Schwab, dropping to 8% of revenues last year and currently under 5%. Net interest income from customer deposits and asset management fees are far more important," added Biggar in an email to Reuters.
Schwab made $139 million from selling its customers' orders in 2018, up 22% from the previous year, according to a regulatory filing.
TD Ameritrade was paid $458 million for customer orders in its last fiscal year, up from $320 million the year before, according to a filing.
Schwab will reduce the commission to zero from $4.95 per trade, starting Oct. 7, the company said.
The company reported an 8% year-on-year jump in second-quarter net income at $937 million.
Schwab managed total client assets of $3.75 trillion, as of July end.