Discount brokerage titan Charles Schwab (NYSE:SCHW) said on Tuesday that it's cutting its commission fees on U.S. stocks and ETFs to zero beginning Oct. 7.
Schwab's move to offer commission-free trading follows a similar move by Interactive Brokers (NYSEMKT:IBKR), which recently launched a free stock trading service. Still, Interactive Brokers fell 9% on Tuesday. Investors were probably hoping that the company's new commission-free service would help it gain market share from its higher-cost rivals. But with Schwab also now eliminating commissions -- and with TD Ameritrade and E*Trade likely to follow suit -- those share gains are unlikely to materialize.
E*Trade and TD Ameritrade's shares were also pummeled on the news. The discount brokerages derive more of their overall revenue from trading fees than Schwab, which generates a greater proportion of its profits from asset management fees and interest income from its customers' deposits. With this aspect of their businesses now disrupted, some analysts believe TD Ameritrade and E*Trade will be forced to merge to cut costs so as to offset their lost commission revenue.
Schwab's decision to forgo trading commission revenue is also due at least in part to the rising popularity of free-trading apps, such as Robinhood. That app is particularly popular among millennials, who are becoming increasingly important for brokerages to woo as their wealth increases.
All told, Schwab's move to eliminate trading commissions on stocks and ETFs is almost certain to dent to the brokerage industry's profits. But it will also probably save you some money on your future stock trades, which makes it a win for individual investors.