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Stock Analyst Update

TD Ameritrade Joins Pricing War

The narrow-moat firm is reducing commissions on U.S.-listed equities, ETFs, and options to $0.

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Following wide-moat Charles Schwab (SCHW) and Interactive Brokers’ decision to reduce trading commissions to $0 on multiple types of trades, narrow-moat TD Ameritrade (AMTD) announced that it is also reducing commissions on U.S.-listed equities, ETFs, and options to $0. TD Ameritrade, like Charles Schwab, will still charge a per contract fee for options trades. TD Ameritrade’s management estimates that this pricing move will reduce revenue by $220 million to $240 million per quarter or 15% to 16% of net revenue. Our fair value estimate for TD Ameritrade remains under review. After re-modeling the company, our fair value estimate for TD Ameritrade will substantially decrease, potentially around 30%. This move by TD Ameritrade increases the probability that narrow-moat E-Trade will also decrease its pricing. Our fair value estimate for E-Trade could decrease around 20%. Assessing the online brokerages competitive positioning and revenue exposures, we have had a high uncertainty rating on Charles Schwab and very high uncertainty rating for TD Ameritrade and E-Trade.

Due to the negative-sum nature of the pricing cuts, we had contemplated $0 commissions in our bear-case scenario modeling, while including around 3% annual pricing declines in our base cases. We have always stated that a decrease in commission prices can be easily matched by competitors, so wouldn’t be a viable competitive strategy. Once all competitors have similar pricing, there would be no changes in market share and all players would have their value decrease from the loss of commission revenue. The values of the major online brokerages have rebased, and it could take a long time for TD Ameritrade and probably E-Trade to fill in the hole in earnings left by pricing actions. Charles Schwab is in a relatively better position, but still faces the likely headwinds from lower interest rates and potential decrease in the stock market.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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