Financial services giant Charles Schwab Corp is launching its own commission-free stock trading offering, reducing the fee it charges from next week to zero from $4.95 per trade. The new offering will provide zero-fee trades on US and Canadian exchange-listed stocks and options, as well as exchange-traded funds (ETFs).
This announcement comes on the heels of Interactive Brokers’ launch of the IBKR Lite, which routes trades through market makers rather than seeking best execution through its smart order router.
In doing so, the company plans to make money from order flows, a common tactic used by discount brokers to generate revenue by directing orders to certain trading venues.
The move mimics the fast-growing service already offered by commission-free investing app Robinhood, which also has zero brokerage fees and has reached six million users in the US. Robinhood raised last year its latest round of funding, bringing in $363 million at a $5.6 billion valuation.
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Other fintech startups, including Menlo Park, are rapidly branching out to offer a range of services beyond their initial area of focus as they seek to add more customers.
Schwab expands takeover targets
Many firms are now using cheap or free trading to attract clients to more profitable businesses. For now, they can keep their free platform afloat through making compromises to some business aspects such as not having many physical locations, a small staff for client service, and not spending on massive promotional campaigns.
In addition, they also make money as users of their basic service become more active and eventually opt for their app’s premium offerings.
While Schwab has been named a takeover target in the potential consolidation of the brokerage market, the company has made moves over the last several years to push further into the financial advice market. The acquisitions centered mostly on firms that have wealth management units that would give the San Francisco discount brokerage access to more customers and thus more assets under management.
Back in 2011, Charles Schwab acquired OptionsXpress for about $1 billion, adding the retail options brokerage, which was founded in 2000, to its equity and mutual fund offerings. The acquired entity has given Schwab a leg up in fast-growing foreign exchange and futures trading, diversifying its online platform that now relies heavily on cash equities.