Let's Discount the Discounters

A full-on price war among discount brokers may mean more pocket change for you and me as investors, but good luck selling that benefit to shareholders of TD AMERITRADE (Nasdaq: AMTD  ) , E*TRADE (Nasdaq: ETFC  ) , and Charles Schwab (Nasdaq: SCHW  ) .

All three stocks took 1% to 4% hits on an otherwise buoyant trading session yesterday, after Fidelity Investments became the latest discounter to drop the limbo stick one notch lower.

Fidelity is best known for its family of mutual funds, but its brokerage arm is sure to get a boost by moving to a flat commission rate of $7.95 per stock trade. Clients were paying as much as $19.95 under the old fees, based on their asset levels and trading activity.

Fidelity's move is clearly a response to Schwab's recent move to do away with its pricing tiers, settling on a flat stock trading commission of $8.95. Both Schwab and Fidelity have also nixed commissions entirely on select ETFs.

Pricing wars aren't new in this space. Financial site Zecco made waves four years ago when it introduced a fee-free trading platform. Major banks followed, with Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) offering to waive stock commissions for large accounts.

The leading discounters overcame the "free" for all. Zecco eventually had to scale back its offer, giving customers 10 free trades if they have at least $25,000 in their account or make 25 trades in a month. Bank of America and Wells Fargo also continue to offer a limited number of free trades, but they each require a total of $25,000 combined across brokerage and certain other accounts with the bank. That's a high hurdle in attracting the masses initially.

Fidelity's move is a bigger blow. It smacks down Schwab, and all but forces E*TRADE and TD AMERITRADE to respond.

The price war comes at a dreadful time for the industry. Trading volumes have dried up, and low interest rates are forcing brokers to subsidize management fees on idle cash. These are the headwinds that found Goldman Sachs marking down its price targets on the three big discount brokers -- as well as OptionsXpress Holdings (Nasdaq: OXPS  ) and TradeStation (Nasdaq: TRAD  ) -- two months ago. Throw a price war into the mix, and Goldman Sachs was apparently right in steering its clients out of this space.

The discounters' funk won't be permanent. Consolidation and irate shareholders will either nudge commissions higher, or create the conditions where the remaining discounters can be more profitable under this new landscape. In the meantime, however, it's hard to get excited about an industry with ever-diminishing pricing power.

Congratulations, discount brokerage clients. My condolences, discount brokerage shareholders.

What's that? You're still unsure about whether or not you should get a new broker? Get thee to our Discount Broker Center to compare sponsored commission schedules.

Charles Schwab and OptionsXpress Holdings are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Foolhas a disclosure policy.


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