TD AmeritradeSchwab Deal Response To New Entrants

The merger could herald a spate of M&A activity in the brokerage industry.

In the largest US securities-brokerage deal ever, TD Ameritrade will be taken over by rival Charles Schwab. The $26 billion deal—which is expected to take up to three years to complete—along with pricing pressures from new market entrants are expected to unleash a wave of consolidation in the brokerage industry.

The megadeal will create a market giant With 24 million accounts and more than $5 trillion in combined client assets. But it faces significant cost pressures from fintechs such as Silicon Valley startup Robinhood, which started offering commission-free stock trading in 2013 via its mobile app.

Last October, both Schwab and Ameritrade, along with E*Trade, Fidelity and the like, dropped equity commissions for their US customers. “We’re not feeling competitive pressure from these firms … yet,” Schwab’s chief financial officer, Peter Crawford, wrote in an October 2019 commentary on the company’s website. “But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants. It has seemed inevitable that commissions would head towards zero, so why wait?” Crawford said that the zero-fee structure would have a 3% or 4% impact on Schwab’s quarterly net revenue, versus the 15% to 16% estimated by TD Ameritrade’s in-house accountants.

If the plan of the megamerger is to offset the loss of income by cutting operational costs and lure more investors willing to pay for options trades and other financial products, there’s still the challenge of successfully integrating staff and the back-end technologies of both companies.

The merger is also likely to attract the scrutiny of antitrust regulators. Customers, too, will have to pay close attention, since even “free” trading can come at a cost: It could lead investors to make risky bets, or trade more frequently and pay steeper taxes on short-term holdings.