There Is a Commission-Free Lunch

Competition drives stock trading fees to zero without a federal rule

WSJ editorial. 

"Charles Schwab caused brokerage stocks to tumble on Tuesday by announcing commission-free online trades that could trigger a cascade across the industry. Behold how competitive markets are making investing less expensive for ordinary folks without government intervention.

Only 7% of retail broker-dealers offer online or internet trading business, but they have become popular among younger and small-dollar investors who want to try their hand at stock-picking. They also help banks and brokerage firms attract new customers, which is one reason they are cutting commissions and fees.

J.P. Morgan Chase last year announced 100 commission-free trades in an effort to recruit young customers to its other investment services. Fintech companies have also launched free trades with smart-phone apps, and last week discount electronic trading platform Interactive Brokers Group Inc. introduced zero-commission trades.

This put pressure on Schwab, which has long been an industry trend-setter, to eliminate its $4.95 commission. Schwab’s stock dropped 9% on Tuesday following its announcement, though TD Ameritrade Holding Corp. (26%) and E*Trade (16%) fell even more as shareholders predicted they will also eliminate online trade commissions to stay competitive.

Once commission-free online trades become the norm, brokers may cut fees on other products too. As the Securities and Exchange Commission recently noted in its broker best-interest rule, “Although discount brokerage firms generally provide execution-only services and do not compete directly in the advice market with full service broker-dealers and investment advisers, entry by discount brokers has contributed to lower commission rates throughout the broker-dealer industry.”

This price deflation is especially notable after Obama Labor Secretary Tom Perez sought to ban broker-dealers from charging commissions with his fiduciary rule, which was blocked by the courts. The rule would have impelled brokers to shift customers to fee-based accounts that can cost small savers more than trade-based commissions.

Many brokerage firms had already moved to charging fees for investment advice because they can be more profitable than commissions for executing transactions. Mr. Perez elided the practical distinction between the two, and his fiduciary rule would have reduced competition and limited retirement investment options.

The SEC’s new best-interest rule allows brokers to continue charging commissions as long as they aren’t putting their own pecuniary interests ahead of their customers. But Schwab is showing how competition can make businesses better stewards for their customers."