Zero-commission stock trading revolution sweeps the U.S., but Canadian investors may have to wait
Canadian investors keen to see their online stock-trading commissions slashed to zero — something two of the biggest brokerage houses in the U.S. did this week — may have to wait a while longer.
Charles Schwab Corp. announced Tuesday it was eliminating online trading commissions for stocks and ETFs listed on U.S. or Canadian exchanges, a move that sent its share price and those of its competitors tumbling. After markets closed, TD Ameritrade Holding Corp., which is partly owned by Toronto-Dominion Bank, took a similar step.
Schwab chief financial officer Peter Crawford said the firm, which has around 12.1 million active brokerage accounts and US$3.72 trillion in client assets, had been seeing new companies trying to break into the market with low or no commissions.
“We’re not feeling competitive pressure from these firms … yet,” Crawford said in a commentary posted on Schwab’s website. “But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants. It has seemed inevitable that commissions would head towards zero, so why wait?”
Some no-fee options already do exist in Canada, such as a National Bank of Canada direct brokerage, which offers commission-free Canadian and U.S. exchange-traded funds, as well as a Wealthsimple mobile app that provides zero-commission stock trading.
But just when the earthquake that rattled U.S. brokers makes its way to Canada — where big banks dominate the financial landscape, and where commissions of nearly $10 a trade are common at some big-bank-owned online brokerages — remains to be seen.
Canadian financial institutions tend to move a little slower than their American counterparts, according to Mike Katchen, Wealthsimple’s co-founder and CEO. It took banks here several years to roll out robo-advisors to compete with Wealthsimple’s product, Katchen said, and he expects something similar with trading.
“But we’re here now and, I think, showing that the model works,” Katchen said. “I would expect that that’s going to come to be a broader offering in the market in time.”
J.D. Power conducts a satisfaction study of Canadian self-directed investors, and commissions have a “pretty meaningful impact” on findings, according to Michael Foy, senior director of wealth and lending intelligence at the research firm. Moreover, the draw of no commissions is that a firm could draw in customers and sell them other products and services.
“I do think that there’s strong reasons for firms to try to attract new clients through eventually reducing trading fees to zero,” Foy said. “And I think that’s increasingly going to be the expectation. I do think that Canada will get there, too.”
Asked if he sees the zero-commission trend coming to Canada, Glenn LaCoste, president and CEO of research company Surviscor, replied “my immediate answer is not immediately.”
I would expect that that’s going to come to be a broader offering in the market in time.
Mike Katchen, co-founder and CEO, Wealthsimple
“We had enough trouble to getting to $10 over time,” LaCoste said. “We don’t have order flow like the U.S. has.”
There are expectations that the latest round of fee reductions could put pressure on other U.S. brokerages to follow suit.
“We wouldn’t be surprised to see other large private and public firms respond,” a Morgan Stanley note said Wednesday.
The steps taken by Schwab and TD Ameritrade also followed those of another competitor, Interactive Brokers Group Inc.
On Sept. 26, Greenwich, Conn.-based Interactive announced a new service called IBKR Lite that offers zero commissions on U.S. exchange-listed stocks and ETFs. A spokesperson told the Financial Post on Wednesday that they are initially making IBKR Lite available to residents in the U.S. and India, but that there could be an opportunity for some Canadians.
“Introducing Brokers — including iBrokers in Canada — may make it available to their clients if they wish to do so,” wrote Kalen Holliday in an email.
An introducing broker can set pricing, which may mean clients end up paying in some way, Holliday wrote. But about a third of the firm’s clients are introducing brokers, and they can opt to use IBKR Lite for clients.