Schwab, TD Ameritrade Could Trigger Spate of Brokerage Buyouts

Reports of possible merger is just the latest disruption in the online brokerage arena

The nation's two biggest publicly traded discount brokers are discussing a merger, according to reports, that could very well set off a frenzy of mergers and acquisitions in an online brokerage industry hampered by free commissions and other aggressive promotions.

Charles Schwab (SCHW (opens in new tab), $44.75) is nearing an agreement to acquire TD Ameritrade (AMTD (opens in new tab), $41.38) for more than $25 billion, CNBC reported early Thursday. Should the deal be struck and pass regulatory muster, the new combined company would create a mammoth in the retail brokerage business.

Other brokers would almost certainly feel pressured to strike deals of their own, analysts say.

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Driving the consolidation among retail brokers is a bruising price war, whereby one broker after another has slashed commissions. Indeed, all the major retail brokerages have moved to $0 commissions in recent months.

The eventual path to zero started in 2013 when startup app-based brokerage RobinHood offered free stock trades. It took a few years for the major players to completely follow suit – several offered batches of commission-free ETFs, or limited amounts of commission-free stock trades, along the way – but when they finally caved, it was an avalanche.

Interactive Brokers Group (IBKR (opens in new tab)) announced a "Lite" version of its platform with commission-free stock and ETF trades in late September. In October, Schwab led the charge among the major online brokerages to unlimited commission-free stock, ETF and options trades, and was soon followed by TD Ameritrade, E*Trade (ETFC (opens in new tab)) and Fidelity.

But with the revenue stream from commissions having all but disappeared, brokers are more dependent than ever in finding new sources of profits and building economies of scale.

"Consolidation thus far has been good, and I think that will probably continue to be the case here," Devin Ryan, financial analyst at JMP Securities, told CNBC (opens in new tab). "The key thing is what does the consumer get out of this? Ultimately the consumer’s been treated very well with lower commission pricing, (they're) getting paid more on a lot of different parts of the platform."

A deal of this size is momentous for the retail brokerage industry. Indeed, SCHW shares jumped by more than 8% shortly after the announcement, while AMTD rocketed nearly 20% higher.

But the news isn't terribly surprising to analysts, traders or investors. Schwab's founder and Chairman Charles Schwab, founder and chairman of his eponymous firm, told CNBC in October that consolidation in the retail brokerage industry is a "logical conclusion that will occur."

JMP Securities analyst Ryan told CNBC that market watchers have been focused on E*Trade as a potential acquisition target. Schwab's entreaties to TD Ameritrade could accelerate that process.

"Everyone's been focused on E*Trade being the potential consolidation target," Ryan says.

TD Ameritrade CEO Tim Hockey disclosed earlier this year that he would step away from the firm in February 2020. The combined company would be run by Schwab CEO Walter Bettinger, CNBC reports.

Dan Burrows
Senior Investing Writer,

Dan Burrows is a financial writer at Kiplinger, having joined the august publication full time in 2016.

A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics and more.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.