What happened
Shares of Charles Schwab (SCHW -0.67%) stock dropped deeply in morning trading Tuesday -- down 8.8% as of 11:50 a.m. -- after the online broker announced that it will soon stop charging commissions for stock, ETF, and other online trades through its online brokerage.
Shares of rival online brokers E*Trade Financial (ETFC) and TD Ameritrade (AMTD) are down even more, falling 17% and 22.7%, respectively, as investors dump shares of online brokers on concerns they'll have to mimic Schwab's move in short order.
Image source: Getty Images.
So what
And investors are probably right about that.
In today's press release, Schwab said it will be celebrating the Oct. 7 release of founder and chairman Chuck Schwab's book Invested by "eliminating commissions for stocks, ETFs and options listed on U.S. or Canadian exchanges, across all mobile and web trading channels."
Schwab will also eliminate its "base" charge of $4.95 on options trades. Clients trading options, however, "will continue to pay [a variable price of] 65 cents per contract."
An options contract generally confers the right to buy or sell 100 shares of a given stock at a given price, up to a specific date in the future. So an option to "put" 1,000 shares of Apple, for example, will still cost about $6.50 at Schwab.
Now what
Clarifying that today's announcement is "not a promotion" and contains "no catches," Schwab CEO Walt Bettinger emphasized "this is our price" going forward, "period." That pretty much eliminates any hope that E*Trade or Ameritrade investors might have that this is a short-term, attention-grabbing stunt that other companies won't necessarily need to match.
They must now either quickly match Schwab's move -- and take the hit to revenue are profits that results -- or resign themselves to seeing customers defect to their rival en masse.
In a related announcement today, Schwab CFO Peter Crawford advised investors that "looking at recent activity, we estimate that this pricing reduction is equivalent to approximately $90-100 million in quarterly revenue, which roughly translates to 3-4% of total net revenue" -- which suggests that the online brokerage stock sell-off this morning may be an overreaction.
