Competition in the retail broker space has been heating up
lately and along with it, consolidation among the major players.
Last April, Ally Financial announced the purchase of TradeKing for $US275 million.
Then, in October, TD Ameritrade said it was acquiring Scottrade for $US4 billion.
UBS thinks that E-Trade may be next — especially if management can’t hit their targets by the second half of fiscal year 2018. The bank notes that not only are other retail brokers potential buyers, but so too are financial institutions and private equity.
In a March 22 note to clients, a team of UBS analysts led by Brennan Hawken wrote:
Using our interactive models, we find that using our $US43 target as a take-out price, fairly conservative deal structures and synergy assumptions could result in an accretive deal for direct peers or regional banks, although given the more obvious scale synergies possible with peers the accretion potential would seem higher for that group. Notably, since Ally’s acquisition of TradeKing, the possibility of a bid from a regional bank or consumer finance company is viewed as possible by investors.
For many years it has been predicted that retail brokerage houses would engage in a “race to zero’ on commissions, choosing instead to make money on deposits, margin accounts, and fund fees in an effort to gain more customers.
A major milestone in this saga was reached in early February when Charles Schwab dropped their per-trade commission to $US6.95 from $US8.95. Rival Fidelity countered, dropping their commissions by a whopping 38% from $US7.95 to $US4.95. Schwab has already responded, declaring that it will match Fidelity.
TD Ameritrade and E-Trade are behind the curve, charging customers $US6.95 per transaction (E-Trade offers $US4.95 for active traders). Additionally, TradeStation, a brand that offers proprietary trading software, eliminated its $US99 per-month infrequent trader fee.
With smaller margins and higher regulatory costs some of these companies may be forced to join forces.
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