Discount Brokerage Weekly Roundup – April 21, 2017

There’s been lots of sabre rattling in the news recently. While the world is facing specter of war, online brokerages in the US are already in the throes of their own price war. For Canada’s discount brokerages, the storm clouds are still off in the distance but as their counterparts in the US have shown, that could change quite quickly. Of course, it’s not all doom and gloom, and sometimes competition can make winners of us all.

This week’s roundup is the tale of two stories. The first is an epic battle shaping up in the US online brokerage space that highlights just how big the stakes are for winning the war for DIY investing and how that could easily spill over to Canada. The second is the latest chapter in the story of sustainable investing and how one Canadian brokerage’s efforts to bring this to DIY investors might be a catalyst for other brokerages to follow suit. Of course, we have the usual feature of DIY investor chatter on Twitter and from the investing forums.

The Price is Right

With Q1 of 2017 now officially in the books, the details of a sudden commission price drop and the scramble that brokerages had to undertake to meet this new pricing reality have emerged. Specifically, the earnings conference calls from E*Trade Financial, TD Ameritrade and Interactive Brokers from this past week provide a fascinating look at the aftermath of the pricing cuts announced in February and March and how executives at online brokerages are bracing themselves for a potentially massive price war.

Now, there are lots of intriguing details in this most recent set of earnings conference calls, more than we can cover off in a single roundup, however what might be instructive to Canadian DIY investors and Canadian discount brokerages is the fact that prices definitely have room to fall and brokerages should probably prepare for that.

One of the most fascinating scenarios acknowledged by both TD Ameritrade’s CEO Tim Hockey and Interactive Brokers’ founder and CEO, Thomas Peterffy, is that it is possible for major US online brokerages today to be charging nothing on commissions and still be profitable.

While upstart online brokerage Robinhood has shown that it doesn’t take charging commissions for trades to be a success, it is an entirely different matter when the largest online brokerages in the US are contemplating the “nuclear option” for commission pricing.

In the case of TD Ameritrade, Tim Hockey stated the following:

“First of all, the good news is that even if commission rates went to zero tomorrow, we’d still be profitable….So, we reached that critical mass size where we’re fully able to work with the competition in terms of the price structure that seems to make sense.”

Loosely translated, this is a clear signal that TD Ameritrade wouldn’t be afraid to throw the first punch or throw down entirely with other online brokerages, big or small, that would like to lower trading commission pricing.

Interestingly, CEO of Interactive Brokers, Thomas Peterffy, also weighed in on the commission price drops with guarded optimism.

Commission pricing for Interactive Brokers is far below that of its US online brokerage competitors and the latest earnings results show that Interactive Brokers is crushing it when it comes to operating margins, earnings and other metrics. In short, there’s a long way that commission prices at the major US online brokerages would have to fall before Interactive Brokers would feel ‘threatened’ and be forced to react with a pricing change.

With that in mind, what Peterffy said that was so striking was:

“if they really were to cut the commissions to 0 as Schwab, for example, could easily do, I think we would have to go out and explain in advertisements more thoroughly as to what is going on here behind the scenes. Because interestingly enough, they advertise that their commissions now are $4.65 a trade, but you see that their commissions are more like $8 or $9 a trade. So it’s hard to figure what’s happening.”

In effect, Peterffy and Hockey are signaling that the largest players in the US online brokerage industry could take commission pricing to zero even today and still emerge standing. Of course, another interesting thing Peterffy disclosed in his statement is that Interactive Brokers would not take such price drops lying down. In fact, throughout the conference call transcripts as well as in recent investor calls, it is clear that Interactive Brokers is not a brokerage that moves slowly or without purpose.

Interactive Brokers and TD Ameritrade aren’t alone in their call to arms. Of the three brokerages’ conference calls that recently took place, E*Trade Financial’s stood out as having the most pointed ‘fighting words’ and with good reason. According to CEO Karl Roessner, “there is a lot of competition out in the marketplace and a lot of offers, unlike things that we’ve seen in the past, we continue to do what we’re doing to make sure we keep our customers and defend the book.”

In fact, it appears that E*Trade is in full ‘transformation’ mode, mobilizing across a number of different facets of their business to compete even more aggressively in the US online brokerage space. Lacking the scale of either Schwab or Ameritrade, E*Trade is shifting the tone of their brand identity by going ‘back to their roots’. They’ve put a target on the active trader segment and appear to be ready to fight tooth and nail to protect their clients from leaving and win over this highly prized segment from the other brokerages.

While there are no publicly traded online brokerages in Canada that would disclose the level of information that these US brokerage CEO’s have shared, the example of what is happening could be highly instructive for Canadian online brokerages.

Yes, the Canadian market is smaller, moves more slowly than the US and just doesn’t have the same kind of marketing firepower at its disposal that the US online brokerages mentioned above do (TD Ameritrade’s annual marketing budget is $250M US, likely a multiple higher than all the marketing budgets of Canadian discount brokerages combined), but the message is clear: in order to win, you have to grow assets.

All of the US online brokerages are confronting the very real scenario of zero commission trading. For Canadian brokerages, however, the storm clouds are on the horizon. The question on this side of the border now becomes: which of Canada’s brokerages will marshal the resources and marketing efforts required to start gathering assets soon enough?

Environmental Scan

With Earth Day just around the corner, the folks at Scotia iTRADE continued their online push of sustainable investing with a Twitter chat, hosted by Canadian personal finance blogger Tom Drake and featuring a number of other online personal finance and sustainable investing voices.

Lasting just about an hour, the Friday afternoon chat was part marketing, part awareness building of sustainable investing. Naturally, Scotia iTRADE being the organizer of the chat had the messaging and branding locked down and put together a very polished campaign to generate interest and engagement in their latest new product offering.

What was particularly interesting, however, is the number of personal finance/independent investing voices that were also involved as well as the amount of social media (specifically Twitter) coverage that the iTRADE ESG (standing for Environmental, Sustainability and Governance) tool received. Since we first reported the launch of this new feature several weeks ago, we’ve seen steady coverage online of this new investing tool.

Clearly, there’s a well-coordinated effort at work to ensure that people are finding out about this new tool and kudos to the Scotia iTRADE team for bringing the tool to investors and to iTRADE’s marketing efforts to have the communications tools (videos) and content to support explaining what it is and why investors should pay attention.

While it is hard to separate the ‘marketing’ from the content of the Twitter chat, there were 6 questions that host Tom Drake pitched to followers of the hashtag #FairTrader. In case you missed it, we’ve provided the tweets from the session below.

Here are the list of questions tackled during today’s Twitter chat on sustainable investing:

  1. What is sustainable investing?
  2. What is ESG and why does it matter?
  3. Sustainalytics, tell us more about the research behind Scotia iTRADE’s Sustainable Investing tools.
  4. Where can you find more information about Sustainable Investing & ESG?
  5. Can you tell us how Scotia iTRADE’s Sustainable Investing & ESG tools work?
  6. Why may Sustainable Investing or ESG be important to direct investors?

Of the answers provided to this series of questions, perhaps the most succinct was from @BoomerandEcho who stated “Profit doesn’t have to be a dirty word – it’s okay to make money as long as it’s not at the expense of people and planet #FairTrader

Scotia iTRADE was not the only Canadian discount brokerage to put the spotlight on sustainable investing this month. Earlier in April, Desjardins Online Brokerage published a short article highlighting the exceptional growth in interest in ESG concerns among managed assets and had scheduled (but later canceled) a webinar on ‘investing and the environment’ for April 20th.

Suffice to say, with the visible success and early traction of the ESG tool and sustainable investing buzz on social media, other Canadian discount brokerages will likely (if they haven’t already) take note. Given the competitive nature of the industry, ideas that resonate with investors tend to get replicated at multiple brokerages (e.g. commission-free ETFs).

The irony and good news heading into Earth Day is, that the competition for profits amongst the brokerages will help bring the ESG and responsible investing tools to investors, which will in turn drive a more socially conscious flow of capital.

Discount Brokerage Tweets of the Week

Lots of interesting chatter this week to keep brokerages on their toes. Mentioned this week were CIBC Investor’s Edge, Questrade, RBC Direct Investing, Scotia iTRADE and TD Direct Investing.

From the Forums

Can’t Fight the Fee-ling

For better or worse, there are those that enter into the world of DIY investing not fully appreciating that it really is about doing it yourself. In this post, from reddit’s personal finance Canada section, one DIY investor learned the hard way that agreements can be changed and that signing on to be a DIY investor means keeping close watch on what’s happening in their accounts.

That Settles It

Although computers and online trading seem to make things work instantly, the reality of stock trading is that there still has to be a transfer of shares from a seller to a buyer and funds from a buyer to seller. As one investor in this post on reddit found out, when you want to tap into your TFSA by selling some stocks, be sure to budget a few days to let the dust and the trade settle.

Into the Close

That does it for another week. As we hurtle towards May, market technicians are watching for sell signals and will no doubt be pouring over charts this weekend to stake their exits. And speaking of exits, Earth Day is a great reason to exit a building and enjoy the great outdoors (so long as the great outdoors is enjoyable) by cheering for a cause (hockey, basketball, Earth, science, or whatever). Have a great weekend!

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