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Was the Charles Schwab-TD Ameritrade Merger a Panic Move or a Sly Calculation?

The Charles Schwab-TD Ameritrade merger has a lot of ramifications for the industry and potentially your portfolio. And how it came about is interesting.

Technical Handshake

Probably the biggest news of the week is that Charles Schwab (SCHW) and TD Ameritrade (AMTD), the two largest publicly traded online brokerage firms, are joining forces, pending regulatory approval. The Charles Schwab-TD Ameritrade merger has sweeping ramifications for shareholders on both sides, the brokerage industry as a whole and potentially your portfolio. But was the $26 billion, all-stock deal a sign of panic by Schwab, or nefariously calculated?

Less than two months ago, Charles Schwab became the first big-name online brokerage firm to do away with transaction fees. Rivals, including TD Ameritrade, almost immediately followed suit. And, as I wrote then, online broker stocks plummeted.


TD Ameritrade shares tumbled 30% in three early-October trading days.

E*Trade (ETFC) shares fell 17% in three days.

Interactive Brokers Group (IBKR) fell 16% in less than three weeks.

And shares of Charles Schwab also fell 16%, in just three days.

All four brokerage stocks had bounced back nicely in the nearly two months since. But not all of them had fully recovered – including AMTD. When rumors of the impending merger first surfaced last Thursday, TD Ameritrade stock was trading at 41, down from 46 before Charles Schwab’s no-transaction fees announcement, and down much further from its March peak above 57.

One StockTwits user characterized the timeline as follows:

Kill commissions
Competitors follow
The stocks get crushed
Make your bid…

Cynical? Sure. Possible? Definitely.

Charles Schwab-TD Ameritrade Merger Fallout

Now that TD Ameritrade shares have jumped above 51, it’s doubtful AMTD shareholders care much about Charles Schwab’s intent. They’re just happy they owned a potential takeover target and are being rewarded for hanging in there after the big October drop.

SCHW stock made a more modest jump in the wake of the deal, but it’s now trading at new 52-week highs above 48.

If you haven’t owned SCHW, AMTD or any other online broker stocks in the last couple months, and you have an online brokerage account, then you’re probably loving that no fees have become the new norm.

But a word of caution: there’s a downside to no fees.

When you pay a commission to buy a stock through your online broker, you can select the share price at which you want your order filled. In other words, you have the luxury of choosing the best fill price.

However, with commission-free brokerages, to recoup the money they’re losing from charging you a trading fee, your online broker sells your order to the highest bidder instead of giving you the fill of your choosing. For instance, if the market on a stock is $9.98 bid – $10.00 ask, and it’s possible that you could buy the stock at $9.99, you’ll instead get it at closer to $10.00 per share—a small difference, but one that adds up if you’re buying, say, 1,000 shares.

These online brokers are getting up to $0.003/share in exchange for your order. So if a trader buys 2,000 shares, that’s $6 extra your brokerage firm gets – more than the $4.95 commission Charles Schwab used to charge on each trade.

Here’s how Jacob Mintz, our options expert and a former market maker on the Chicago Board of Options trading floor, described it:

“Basically, it’s a gateway drug,” he said, “a marketing ploy to get people to bring their money to these sites. But the thing is, with these zero commissions you are giving up a good fill, potentially.”

It’s something to track and keep a close eye on, even while appreciating the fact that your online broker no longer charges you a dime to make a trade.

The online brokerage landscape has changed a lot in the last two months. And the Charles Schwab-TD Ameritrade merger might not be the last pair-up now that most online brokers are making less (or in many cases, zero) money on commissions.

Give Charles Schwab credit for being savvy. And, perhaps, a bit cut-throat.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .