(Bloomberg) — First, Charles Schwab Corp. upended the retail brokerage business by cutting commissions to zero. Now, it’s seizing on the turmoil it unleashed to acquire one of its biggest rivals, TD Ameritrade Holding Corp.
Just weeks after Schwab stunned competitors by letting customers trade stocks for free, the company is moving to tighten its grip on the industry with talks to acquire TD Ameritrade, according to a person familiar with the matter.
The deal would give Schwab, America’s original discount broker, even more sway over the industry it pioneered nearly a half-century ago — and an edge in the intensifying battle for ordinary investors’ dollars, and the investment adviser business. The tie-up would result in a $5 trillion titan, but analysts say it could attract antitrust scrutiny.
“An acquisition of TD Ameritrade would expand Schwab’s roster of active traders and solidify its leading position serving independent advisers,” said David Ritter, a financials analyst with Bloomberg Intelligence.
A transaction could be announced as early as Thursday, the person said, asking not to be identified because the discussions are private. The companies didn’t immediately respond to emails and phone calls seeking comment.
TD Ameritrade jumped about 20% at 10:33 a.m. in New York trading, the most since 2008. Schwab gained 8.1% after earlier rising as much as 14%.
Shares of E*Trade Financial Corp., which analysts have speculated TD Ameritrade might want to buy, fell 9%. A deal between its two rivals could leave smaller brokerage E*Trade contending with a more formidable competitor than ever.
Schwab’s move to zero commissions forced other brokerages to follow suit and triggered a slump in the shares of firms, with TD Ameritrade among the hardest hit. It swept away a revenue stream and rekindled speculation that online brokerages might have to cut deals to survive the increased industry pressure.
TD Ameritrade has relied more on commissions than some competitors, drawing 36% of its net revenue from commissions in 2018, compared to 7% at Schwab.
|Brokerage||Commissions as a percentage
of net revenue, 2018
For founder Charles Schwab, ending commissions has been a longtime goal.
“I hated commissions,” Schwab said at the Impact 2019 conference in San Diego. “I hated them then. I hate ’em now. I took ’em away.”
Schwab had also hinted he was open to deal-making.
“I don’t know whether we’ll be successful in that pursuit, but in the industry you’re going to see more consolidation, more firms getting together,” he in an interview with Bloomberg Radio in October. “You just have to have that scale and volume. So we’re prepared to do it if the opportunity arises. If not we’re perfectly happy to go it alone.”
A deal between the two companies could face anti-trust scrutiny, Keefe, Bruyette & Woods analyst Kyle Voigt wrote in a client note Thursday.
Schwab and TD Ameritrade are both top custody service providers to independent financial advisers, which could give authorities pause. Voigt estimates Schwab has about a 50% market share of registered investment adviser custody assets, while TD Ameritrade may have up to 20%.
An acquisition would come at a time of transition for TD Ameritrade. The Omaha-based brokerage said in a surprise announcement in July that Chief Executive Officer Tim Hockey would leave no later than the end of February 2020, rekindling questions of whether it would pursue a deal. Hockey denied that his departure had anything to do with a potential deal at the time. Toronto-Dominion Bank, Canada’s second-largest lender by assets, owns a 43% stake in TD Ameritrade.
Todd Rosenbluth, director of ETF research at CFRA Research, said that a tie-up of the two firms could help address the burn of zero commissions with increased scale.
“It would reduce the likelihood that investors bounce around,” he said. “They’d have a go-to destination.”
Rosenbluth added that the same principle would apply for independent advisers, who increasingly choose between the two firms for clearing and trading services.
“There’s scale benefits for them to provide,” he said.
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