It appears that the broker wars may end with a grand alliance.

Industry titan Charles Schwab (NYSE:SCHW) is in talks to acquire fellow discount brokerage TD Ameritrade (NASDAQ:AMTD), according to CNBC. Schwab will pay as much as $26 billion for its rival, according to the Financial Times.

TD Ameritrade's stock surged on the news and finished the week up more than 18%. Schwab's stock also rose, to the tune of about 8%, signifying that the market believes a merger could create value for investors.

Pawn chess pieces surrounding a king chess piece

A Charles Schwab and TD Ameritrade merger could create an industry powerhouse. Image source: Getty Images.

The deal would combine two of the brokerage industry's most powerful companies. Together, Schwab and TD Ameritrade would oversee more than $5 trillion in client assets, with tremendous scale across trading and advisory services. 

A larger asset base would be particularly valuable to Schwab, which relies heavily on the interest income it earns on its clients' cash deposits.

A merger would also allow the combined company to shed costs by aligning back-office operations and technology platforms. Analysts at Wells Fargo estimate that Schwab could reduce TD Ameritrade's cost structure by half, boosting its profits in the process. 

Notably, Schwab's offer came at a time when TD Ameritrade's stock was trading at a sizable discount to its 52-week highs. Schwab's move to cut stock-trading commissions to $0 in October led to a steep sell-off in TD Ameritrade's shares, along with that of other brokers, who relied more on trading commissions to generate profits than Schwab. So Schwab's reported $25 billion offering price, although representing a significant premium to where TD Ameritrade had been trading before news of the pending deal broke, is still significantly below the more than $30 billion market capitalization TD reached earlier in the year. 

That could raise the ire of regulators, who could view Schwab's move to cut commissions to zero as a means to cripple its competitors -- one of which it then tried to acquire at a sizable discount. Regulators will also factor the potential market dominance of a combined Schwab and TD Ameritrade into their decision. As just one example, Schwab is already the largest custodian for registered investment advisors (RIAs), and acquiring TD Ameritrade would add another 7,000 of these investment firms to its platform. 

As such, it's possible that regulators may not approve Schwab's rumored acquisition of TD Ameritrade, even if the two companies do reach a formal agreement in the days ahead.