Zero Commissions …The Flippening is Accelerating

Today, Charles Schwab cut commissions to zero.

And the crowd went wild….selling every brokerage stock as fast as they could.

I’m not sure what took the sellers so long to wake up to this inevitability.

I have some very strong opinions about all this obviously as a Robinhood investor and with Stocktwits launching a free trading app.

For years I have wondered why there was no Lyft to Robinhood’s Uber in the North American mobile free brokerage space. I am grateful that the venture capitalists and founders have been busy with ride sharing and office fragmentation. That has changed in 2019. In the last few months, I have seen at least 20 free trading app pitches come through my email. Also, SoFi and Square have launched/announced free trading apps in the last 60 days. The chase is on.

Six weeks ago I speculated on the ‘flippening‘… a moment when Robinhood would pass Etrade in valuation. Today Etrade was down 17 percent. Of course, if Robinhood was a public company today, their stock would likely have been sold down like the rest. But Robinhood is not public, is well capitalized and built from the ground up to survive and thrive in a zero commission world. They don’t have the legacy cost structures that Etrade/Ameritrade/Schwab etc will have to deal with. I imagine the layoffs are coming next.

For a further taste of the damage today…

Let’s take a look at the one year chart of TD Ameritrade which was hit the hardest on the Schwab news:

That is one ugly chart.

For some perspective, here is the 10 year chart:

Today was not just technical damage to the sector…but a secular hammer.

The brokerages will have to show that they can build growth revenue models in a low interest rate and lower commission revenue world.

Before you get too bearish though please take note of this chart which shows have commissions have been declining since the 1970’s from this great Ben Carlson piece (read it all):

Some mega winners are going to emerge from this carnage. I have been making private investments in this sector for a decade along this hypothesis and believe there are so many more great opportunities ahead. Today’s news just speeds everything along.