Charles Schwab is ending commissions on stock trading and the brokerage shares are tanking

Key Points
  • Starting on Oct. 7, Charles Schwab will be slashing its online trading commissions for U.S. stocks, ETFs and options from the previous $4.95 to zero.
  • Shares of Schwab fell 9.7% in response to the move. Competitor TD Ameritrade lost 25.8%, on track for its worst day since 1999.
  • Stock trades previously cost $4.95 on the Schwab platform.
Schwab eliminates stock, ETF and options commissions
Schwab eliminates stock, ETF and options commissions

Charles Schwab said Tuesday that it is ending commissions for online trading in U.S. stocks, exchange-traded funds and options, the culmination of a yearslong fee battle in the brokerage industry.

Shares of Schwab fell 9.7% on fears the change will hit margins. The broker said commission fees make up 3% to 4% of net revenue each quarter. Rival brokerage firm TD Ameritrade plummeted 25.8% for its worst day in 20 years. E-Trade shares cratered 16.4% for its worst day since 2009.

Starting on Oct. 7, Schwab, which holds about $3.72 trillion in client assets, will be slashing its trading commission cost for U.S. stocks, ETFs and options from the previous $4.95 to zero. Trading options will continue to cost 65 cents per contract. The changes will apply to securities on Canadian exchanges as well.

The firm's "passion has been to make investing easier and more affordable for everyone," founder and Chairman Charles Schwab said in a press release.

"This is our price. Not a promotion. No catches. Period," added CEO Walt Bettinger.

After Silicon Valley start-up Robinhood offered stock trading for free in 2013, analysts predicted it was only a matter of time before the major brokerages were also forced to go to zero. The announcement comes after Interactive Brokers took the same step toward commission-free trades on Thursday and J.P. Morgan Chase unveiled its own free trading app in August.

Here's how Schwab's elimination of trade fees impacts brokerages
Here's how Schwab's elimination of trade fees impacts brokerages

Last summer, Vanguard Group announced investors using its online brokerage platform could trade all ETFs on a commission-free basis.

"Free trading isn't a new theme in the industry, but the cadence of announcements from firms offering zero commission trades seems to be picking up, and we also note that many of these companies have more credible platforms (and capital behind them) than the offerings of the past," said JMP Securities' Devin Ryan in a note to clients last month.

Schwab's chief financial officer, Peter Crawford, estimates the commissions fed about $90 million to $100 million in quarterly revenue. However, the commissions per revenue trade have been dwindling for multiple years.

The company, with a market value of about $54.7 billion, is hoping the lost fee revenue will be made up for in new assets for the firm. The last time the financial services company, with about 12 million active brokerage accounts, lowered its commission fee was in February 2017, and assets under management grew from $2.92 trillion to the current $3.72 trillion, according to a Charles Schwab spokesperson.

Since the start of 2013, the year of Robinhood's launch, Charles Schwab has returned only 7.9% per year, below the 11% annual return of the S&P 500. TD Ameritrade has returned even less at just below 5% a year.

Schwab's announcement is likely to pressure TD Ameritrade and E-Trade to drop commission fees. However, trading commissions make up about 25% of TD Ameritrade's annual revenue and 16% of E-Trade's yearly revenue, JMP noted, a much larger portion of revenue than Schwab's 7% annual revenue, the firm estimates.

— CNBC's Jeff Cox and Kate Rooney contributed to this report.