Industry News: Battle for Market Share Using Commission Free Trading Heats Up

In a surprise move that caught the OTC trading markets off-guard, US-based Interactive Brokers announced last week that they will be offering a new service, known as IBKR Lite, that will allow users to invest in US stocks and exchange-traded funds with no commission or market data fees. It was previously reported that Interactive Brokers (IB) experienced a sharp decline in retail customer deposits in the last quarter, and as such, the company likely chose to find a way to bring some business back to the table.

This move is quite unprecedented, as the online stock and ETF trading providers in the US have never offered a commission-free service, given the fees and operational costs these brokers incur themselves. While many people asked “how are they going to do it?”, the individual stocks of Interactive Brokers’ biggest competitors – namely TD Ameritrade, Charles Schwab and E-Trade Financial all plummeted on Thursday, September 27th.

While the hit to share prices of IB’s competitors will not put them out of business, it surely made them notice. As of this post, it looks like most if not all of the big name brokerages have now also introduced some type of commission-free account in order to continue to compete. It will be important to look at the quarterly revenue numbers for these firms to see what impact these developments may have on their bottom line.

This situation raises a broader question regarding pricing and commission “wars” between brokers. Will the major online US brokerages do away with commissions altogether over time and will their EU and other international counterparts also follow suit to stay competitive?

A less drastic version of events surrounding IB in the US happened in the retail FX markets a few years ago, when major international brokerages were constantly tightening trading spreads in order to stay competitive. The long term impact of this competition has resulted in significantly reduced costs for traders and thus, has attracted many new traders to FX and CFD trading, but has also impacted the bottom-line for brokers. We will see if the same hits home for prominent international stock and ETF brokerages in the future.