By Mark DeCambre, MarketWatch
MarketWatch photo illustration/Bloomberg, Reuters
This is an updated version of an article originally published on Nov. 21.
The merger between Charles Schwab and TD Ameritrade Holding Corp., may just be the start of a parade of consolidation in the discount-brokerage arena, market experts told MarketWatch.
“Expect more consolidation throughout the industry,” said Michael Spellacy, a capital markets expert at Accenture, in emailed comments last week, after reports the rivals were in merger talks. “We are in the early innings,” he said.
Those talks led to a deal, with the companies on Monday announcing an agreement that would see Schwab buy Ameritrade in an all-stock transaction valued at around $26 billion. Shares of both companies rose strongly last week on reports of the potential tie-up. Schwab /zigman2/quotes/201281754/composite SCHW -4.92% shares were off 0.2% Monday, while Ameritrade /zigman2/quotes/207561492/composite AMTD -4.78% rallied 4.4%.
An exchange-traded fund that tracks a portion of the investment industry, the iShares U.S. Broker-Dealers & Securities Exchanges ETF /zigman2/quotes/208279306/composite IAI -1.67% also gained ground, rising 0.9%.
The rally last week turned TD Ameritrade’s stock positive for the year, it’s now up around 3% so far in 2019, while Schwab has gained around 17% in the year to date.
The deal came after Schwab began offering clients no-fee trading on equities, exchange-traded funds and options on Oct. 7, igniting a furious race to the bottom on commissions for some of the nation’s most prominent discount brokers. That resulted in some of the heaviest selling pressure for the those brokers in years, including smaller rivals E-Trade Financial Corp. /zigman2/quotes/205731930/composite ETFC -2.52% and Interactive Brokers Group Inc . /zigman2/quotes/208880397/composite IBKR -3.44% .
On Monday, shares of E-Trade were 2.4% higher while shares of Interactive Brokers rose 2.8%.
The zero-commission skirmish sparked speculation that brokers, which were facing a shrinkage of revenues from commissions, would need to consolidate to create efficiencies.
“We expect most firms in the sector, including ETFC, to be in merger discussions given the pressures on the business, this transaction, game theory, as well as the attractive synergies and accretion,” wrote Bank of America Merrill Lynch analysts Michael Carrier, Dean Stephan and Sameer Murukutla, in a Thursday note.
Experts had said a Schwab-TD Ameritrade tie-up would pose an immediate threat to smaller rivals, assuming a deal passes muster with antitrust regulators.
Those left on the outside of such deal may be forced to find partners in the face of the monumental task of challenging TD Amertrade and Schwab for business.
“[Schwab] management has been consistent in its messaging around scale playing an increasing role in determining the industry’s ‘winners’ and ‘losers,’” said Christopher Walsh, vice president of equity research at Buckingham Research Group, in emailed comments last week.
“In our view, the speculated bid for [TD Ameritrade] is a proactive step to consolidate market share, improve efficiency (60-70% of the target’s expenses could feasibly come out) and accelerate the company’s evolution towards (higher-multiple) advisory services areas with asset-based and subscription-based pricing,” he wrote at the time.
Kristi Ross, co-CEO of tastytrade (parent of financial firms tastyworks and Dough), told MarketWatch last week that the prospect of a big merger could prompt smaller names, including Robinhood, Stash and her own firm, to acquire or to find partnerships, against the backdrop of a market that has climbed toward all-time highs and amid worries of a U.S. economy in its 11th year of expansion and, perhaps, primed for a recession.
“What I am seeing right now is that with the markets being at all time highs, there is less risk than when the market takes a downturn but when the market takes a downturn even those millennials who have been investing, they haven’t seen a downturn so when those customers, those newer [brokerage] entrants don’ know how to deal with that,” she said.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.78% , the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.05% and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -1.79% were higher Monday, with the S&P 500 and Nasdaq trading above their record closing highs from early last week.