Schwab Launches Commission-Free Trades in the U.S. and Canada

Update6 months ago
In its announcement of Chuck Schwab's latest book, SCHW announced commission-free trading on most equity products in the U.S. and Canada.
On Tuesday morning, Schwab dropped ~10% after announcing it was eliminating trading commissions on U.S. and Canadian-listed stocks, ETFs, and options.
The announcement followed a similar move from discount online broker Interactive Brokers (NYSE: IBKR), who recently launched their own no-commission trading product.
We believe this announcement brings to fruition the long-bubbling trend of reduced reliance on trading commissions at online brokerage firms. The market read the move as a negative surprise, but we believe the reaction ultimately missed the forest for the trees.
Schwab's edge has never come from its strength in trading commissions or its ability to make money off of small day traders. Instead, it's come from the comprehensive value proposition it delivers to everyday consumers, which helps drive a powerful flywheel of more customer inflows, more interest income, greater investments in value proposition, and so on.
Furthermore, we believe the entire commission cut would likely only impact revenues by ~3-4%. This is because the vast majority of Schwab's revenues comes from net interest income - or in other words - the interest that Schwab generates on its managed assets. As of 2017, nearly half of the trades conducted on Schwab were already commission-free, so this should be no surprise.
When it comes to contextualizing strategic logic behind this move, we think Schwab's CFO really put it best:
* * * *
It has seemed inevitable that commissions would head towards zero, so why wait?
We have a business model that doesn’t depend on commission revenue, a long-term orientation a history of being willing to disrupt ourselves based on client needs and competitive dynamics.
That’s exactly what we are doing here – we’re making these pricing changes because we believe they enhance both our value proposition and our competitive positioning, encouraging the consolidation of client assets and trades at Schwab.
* * * *
The process of "cannibalizing" one piece of your own business to benefit another is never painless. However, we believe Schwab's management deeply understands its long-run economics, and will continue to do what is best to maximize the value of its business over the long-term.
As of this writing, SCHW was a portfolio holding of Titan Invest. This security may cease to be a portfolio holding at some point in the future.

Become a Titan investor today.

Titan Invest is an SEC registered investment adviser. By using this website, you accept our Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities. Past performance is no guarantee of future results. Any historical returns, expected returns [or probability projections] are hypothetical in nature and may not reflect actual future performance. Account holdings are for illustrative purposes only and are not investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.
Refer to Titan Invest’s Program Brochure for more information. Certain investments are not suitable for all investors. Before investing, consider your investment objectives and Titan’s fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Brokerage services are provided to Titan Clients by Apex Clearing, an SEC registered broker-dealer and member FINRA/SIPC. For more information, see our disclosures. Contact: 110 Greene Street, Suite 910, New York, NY 10012. Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
© Copyright 2020 Whisker Technologies, Inc. All rights reserved.