The race to zero trading commissions that we are witnessing today in the brokerage industry is not new. We have seen it manifest itself in the form of declining trading commissions and advisory fees over the years. However, there has been an acceleration in this trend recently, wherein major brokerage firms in the U.S. dropped their equity and ETFs trading commissions down to zero. The tipping point was industry incumbents’ reactionary move to match the commission-free trading offered by the new entrants, further compounding trends in the margin compression at these established brokers and custodians.
Schwab and E-Trade, two of the largest brokerage platforms in the industry, expected to lose about seven to ten percent in annual revenue over the past year because of commission-free trading on their platforms. That expected revenue loss is still far less than their competitors’ TD-Ameritrade and Interactive Broker. The two firms collected about a third of their revenues in the form of trading fees in 2019. Brokerage firms will have to adapt to the structural change driven by the commoditization of the brokerage model by re-evaluating their business models, the backbone of value creation, and ensuring that they are in line with the new market realities.