US Brokerages lose $15 Billion of M-Cap
Hitherto, large brokerages in the USA like Interactive Brokers, Charles Schwab, TD Ameritrade, E-Trade, etc were dismissive of the threat posed by Robinhood.
They were merrily ripping off their clients by charging as much as $7 (Rs. 525) per trade.
This led to the brokerages earning mind-boggling revenues of as much as $1.9 Billion (Rs. 15000 crore) each from hapless investors.
However, they grossly underestimated the abilities of Robinhood’s founders, Baiju Bhatt (an Indian) and Vladimir Tenev.
The duo offered the same services as the large brokers but at zero cost.
Naturally, all investors jumped ship. They migrated in droves from the big brokerages to Robinhood.
Interactive Brokers was the first to buckle under pressure.
A few days ago, it introduced a “lite” plan under it which charges no brokerage.
— Interactive Brokers (@IBKR) September 26, 2019
The other brokerages had no option. They also fell in line and reduced the brokerage to zero.
— TD Ameritrade News (@TDAmeritradePR) October 1, 2019
"E-Trade is getting rid of commission fees on U.S. stock, ETF and options trades.
The move comes within a week of Interactive Brokers, Charles Schwab and TD Ameritrade all dropping their commission fees."https://t.co/K3P7vJ9zRe
— Sebastian Sienkiewicz (@Amdalleq) October 2, 2019
Today, Schwab, Ameritrade, and Interactive Brokers eliminated trading fees. It’s amazing to see what fintech can do for consumers!
— Zachary Perret (@zachperret) October 2, 2019
Wild that within a week all the online brokerages have eliminated commissions on stock trades, which was a big revenue stream for them.
TD: 36% of revenue ($1.9B)
Interactive Brokers: 41% of revenue ($750M)
E-trade: 17% of revenue ($480M)
Schwab: 7% of revenue ($400M)
— Tanay Jaipuria (@tanayj) October 3, 2019
Charles Schwab, Thinkorswim, and Interactive Brokers are allowing retail traders to trade commission free. That’s HUGE.
All because Robinhood offered commissions free trades.
— Wood™ (@WoodroCinco) October 2, 2019
Steve Sosnick, the Chief Strategist of Interactive Brokers, struggled to keep a brave face when asked why his firm slashed the brokerage.
“This has been building. This is the inevitable result,” he said, his shoulders slumped.
Highlight: “As usual, Schwab gets the credit,” says Interactive Brokers Chief Strategist @SteveSosnick on brokers racing to offer commission-free trading. “But this has been something that’s building. This is sort of the inevitable result.” https://t.co/xpAujlCWBd pic.twitter.com/pKvAfl9ZP7
— Yahoo Finance (@YahooFinance) October 3, 2019
Naturally, the move proved catastrophic for the brokerage stocks. They tanked and lost a colossal fortune of $15 Billion in market capitalization in the course of a few days.
#OnlineStockbrokers tumble after #Schwab cuts commissions to $0! #NoCommissions #FreeTrades$ETFC – #ETRADE
$36.39 -7.30 (-16.71%)$AMTD – #TDAmeritrade
$36.00 -10.70 (-22.91%)#IBKR – #InteractiveBrokers
$48.58 -5.20 (-9.67%)$SCHW – #CharlesSchwab
$38.50 -3.33 (-7.96%)
— Cash-Flow Investor (@BoB2Trader) October 1, 2019
The race to Zero – Can the Indian brokerage industry survive?
Nobody knows the discount brokerage industry better than Nithin Kamath, the Billionaire visionary co-founder of Zerodha.
The action of the US brokerage industry of collectively slashing brokerage has not gone down well with him.
“If this race does catch up in India, it will be a certain end for traditional brokers who rely mainly on retail broking for revenue, especially with the new limitation around margin funding,” he has said in a grim tone.
He has explained that the US brokerages will be able to survive despite the onslaught of the 0-commission because they have multiple other streams of income such as (i) interest on idle balances of customers, (ii) selling order flow to HFT (high frequency traders), (iii) lending of securities from the customers’ Demat accounts, (iv) advisory services etc.
These items of income contribute several billions of dollars to the broker’s kitty.
However, Indian brokerages are not entitled to most of these privileges.
Under SEBI’s rules, idle balances have to be returned to the client and the order flow cannot be sold to third parties.
Brokerages are presently able to eke out a living by offering advisory services to clients.
However, SEBI is taking a dim view of the issue on the ground that there is a conflict of interest between the broker and his client.
The broker tries to peddle those products on which he earns the highest commission.
SEBI is accordingly encouraging the growth of Registered Investment Advisers (RIA).
If SEBI decides to prohibit brokers from offering advisory services, it will be the “final nail in the coffin,” Nithin Kamath says.
“The day SEBI comes up with a regulation that disallows brokerage firms to advice and place trades on behalf of customers, that would be the final nail in the coffin for the traditional brokerage industry. Most old school firms today survive only because they are being run as a quasi wealth-management firm using a brokerage license.”
“I think if all brokerage firms in India like in the US did start dropping the price to 0, the industry in its current form will not be able to survive,” he has added.
Since so many were asking my opinion, here is why I think it will be a disaster if all brokerage firms in India decided to take the 0 commission route like what is happening in the US. For @Rainmatterin & people part of the ecosystem.https://t.co/f42KrfMgd3
— Nithin Kamath (@Nithin0dha) October 3, 2019
Will Zerodha’s own valuations shrink if the big guns also offer zero-brokerage?
One aspect that it is not spelt out in Nithin Kamath’s analysis but which is implicit is that Zerodha will itself also be a victim of the zero-brokerage syndrome.
Presently, Zerodha is the market leader in the discount brokerage business and commands a lions’ share.
However, if heavy weights like Motilal Oswal, ICICI Securities, Angel Broking, HDFC Securities, Kotak Securities etc, etc muscle their way into the field, Zerodha will obviously lose its dominance.
Naturally, this will affect its own valuations and adversely affect plans to go public via an IPO in the near future.
PayTM may turn things around – give investors commission to buy stocks
PayTM became famous for offering customers generous “cash backs” to route business through its platform.
We shouldn’t be surprised if PayTM, in its capacity as broker, offers incentives to investors to buy and sell stocks through it.
Serious question: What’s stopping someone from paying us to trade? Why stop at zero?
— Ramp Capital ♿️ (@RampCapitalLLC) October 2, 2019
Yeah, we deserve to get paid for providing liquidity to the market!
— David Nohejl (@DavidNohejl) October 2, 2019
I will take a free toaster oven for moving my accounts. Cheap!
— Rob Goldson (@rgoldson) October 2, 2019
I’m moving to whichever broker covers my monthly healthcare, auto, and mortgage costs.
— Ramp Capital ♿️ (@RampCapitalLLC) October 2, 2019
Should we dump brokerage stocks?
It goes without saying that the brokerage business is now a sunset industry.
It is hard to believe that at one time in the past, some of these stocks like Emkay Global were the hot favourite of Dolly Khanna and Porinju Veliyath.
— ET NOW (@ETNOWlive) September 5, 2017
and Emkay Global is up 11% ????
— Rishi Bagree ऋषि ?? (@rishibagree) March 3, 2017
Emkay Global huge potential for multibagger. Dolly khanna and porinju increased stake in emkay global. @porinju
— Nirav S. Karia (@caniravkaria) March 28, 2017
However, all of those days are in the past.
Presently, stocks of leading brokerages like Motilal Oswal, Edelweiss, Emkay Global, Geojit, Dolat Investment, AB Money, LKP Securities etc are languishing at their 52-week lows.
So, if we are invested in any of these stocks, we should dump them ASAP and bolt before the contagion spreads!