Charles Schwab Zero Commissions on Stocks and Options Starting 2019 - What It Means for Investors

In a groundbreaking move effective October 7, 2019, Charles Schwab eliminated base commissions on U.S. equity, ETF, and options trades, including OTCBB and penny stocks. With $3.7 trillion in assets under management and over 12 million clients, Schwab's zero-commission policy is sending ripples throughout the brokerage sector, challenging competitors like TD Ameritrade and E*TRADE.

Peter Crawford, Schwab's CFO, explained the rationale behind this bold step: "The trend toward zero commissions was inevitable, so we chose to lead the change. Our business model doesn’t rely on commission revenue, allowing us to focus on client needs and stay competitive by disrupting ourselves." Despite new market entrants offering zero or low commissions, Schwab aims to proactively adapt rather than react too late, as some industries have in the past.

It's important to note that while base commissions are gone, options traders will still pay $0.65 per contract, as the base rate per leg is eliminated but contract fees remain.

Financial Impact on Schwab

Schwab estimates this pricing change will reduce quarterly revenue by approximately $90-100 million, representing about 3-4% of total net revenue. However, as commission revenue has been declining for years, the actual impact may be smaller moving forward. Despite the long-term benefits, Schwab’s stock experienced a temporary decline of up to 10% following the announcement.

Implications for Individual Investors

Investors should evaluate more than just commission fees. Consider how your broker handles idle cash, the quality of trade executions, fees for other asset classes, and additional services offered. For example, futures traders may not benefit from zero equity commissions. Some brokers, like Interactive Brokers, openly generate revenue by routing orders to market makers, while others like Robinhood are less transparent. Large trades over 200 shares might incur hidden costs despite zero commissions.

True value for investors will come from brokers delivering excellent trade executions alongside low or no fees.

Industry Reaction

Following Schwab’s announcement, Interactive Brokers launched IBKR Lite, offering commission-free trades on U.S. stocks and ETFs. Other platforms like the dough app, Robinhood, and TradeZero also provide commission-free trading options. Schwab’s entry into this space significantly raises the stakes, forcing the industry to innovate and find new ways to attract and retain customers.

Who’s Next in the Zero-Commission Race?

TD Ameritrade and E*TRADE face greater challenges from Schwab’s move, reflected in their stock price drops of over 25% and 16%, respectively. Fidelity remains private and less impacted, citing higher cash sweep rates and emphasizing value through scale and service rather than competing solely on commissions.

The Future of Trading Commissions

Victor Jones, CEO of dough, predicts that paying commissions for stock trades will soon be as outdated as landline phones. As of 2024, the industry’s shift toward zero commissions is well underway, driven by evolving client expectations and technological advancements. Firms clinging to traditional commission models risk losing relevance as customers demand cost-effective, transparent trading experiences.

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