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Charles Schab is ending trading commissions for stocks, ETFs and options, only a few days after rival Interactive Brokers Group launched a zero-commission service, my Barron’s colleague Daren Fonda reports.
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The moves ratchet up the heat on other online brokerages to drop trading commissions, and investors are selling shares of Schwab, Interactive Brokers Group, TD Ameritrade , and E*Trade in the wake of the news. The fear is that the zero-commission trend will eliminate significant revenue streams for these companies.
Online brokers already face other revenue pressures as falling interest rates have squeezed the margins on the interest income they earn from clients’ cash deposits. This helped cause a recent round of job cuts at Schwab.
For investors, commission-free trades carry undeniable appeal, but as Fonda writes in another Barron’s article, they can come with catches. Brokerages can charge a high margin rate or offer weak yields on cash reserves. And how they execute trades can carry hidden costs.
“Most brokers receive payments for routing orders to electronic trading firms, which are known as market makers,” he writes. “The practice may result in clients receiving worse trade execution than they would get without such payments in the mix.”
–Ross Snel