The end of commissions for stock trading is near as TD Ameritrade cuts to zero, matching Schwab

The “race to zero” for the brokerage industry is over.

TD Ameritrade said late Tuesday that the company will eliminate all commission fees for online U.S. stock, exchange-traded fund and option trades. The move came hours after brokerage giant and competitor Charles Schwab said it is ending commissions for online trading this week. Analysts expect most of the industry to follow suit shortly.

The match by TD Ameritrade failed to shore up its crashing stock. Shares of TD fell 2% on Wednesday following a 25% plunge, its worst day in 20 years, on Tuesday. Analysts cited a higher reliance on commission revenues as a reason for its out-sized decline.

“We expect Fidelity and E*TRADE to react next and announce cuts to their own commission rates over the short-term, with both likely matching SCHW’s/AMTD’s zero rate,” said Credit Suisse’s research analyst Craig Siegenthaler in a note to clients titled “Finishing the Race to Zero.”

Starting on October 3, TD Ameritrade’s commissions will go from the previous $6.95 to zero. Options will still have a 65 cent per contract fee. The changes will apply to securities on Canadian exchanges as well.

“With a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients,” said president and chief executive officer of TD Ameritrade Tim Hockey in a press release.

Major brokerage firms have been pressured to go to zero fees since 2013 when Silicon Valley start-up Robinhood offered stock trading for free. Since then, Vanguard Group slashed fees on ETF trades and J.P. Morgan Chase started its own free trading app.

“The changes taking place across the brokerage industry reflect a focus on the customer that’s been inherent to Robinhood since the beginning. We remain focused on offering intuitively designed products that reduce barriers to our financial system, including account minimums and commission fees,” said Robinhood spokesperson Jack Randall.

But the tables have turned on Robinhood, which will now be competing against monster brokerage firms with the same fee structure that put them on the map.

“We believe it will be challenging for competitors in other wealth management channels to compete with the retail businesses of SCHW and Fidelity given their consumer value proposition which includes a high level of client service for a very low cost,” said Siegenthaler.

TD Ameritrade’s chief financial officer, said its zero fee structure will have a 15% to 16% impact on quarterly net revenues, compared to the 3% or 4% that Schwab’s CFO estimates.

Bank of America estimates TD Ameritrade generates 28% of revenues from commissions and Schwab generates only 8% from revenue. E*Trade, which still charges commission fees, gets about 17% of revenue from commission.

The firm double-downgraded TD Ameritrade to underperform from buy on Tuesday based on “relatively high commission exposure, continued pricing pressure in the sector and earnings risk, a lower interest rate backdrop, margin pressure, and a CEO transition into 2020,” Bank of America’s Michael Carrier said in a note to clients.

Barclays downgraded the entire online brokerage sector on Wednesday, including Schwab, E-Trade, and TD Ameritrade, to underweight for getting ride of its “most lucrative trading product.” The firm said E-Trade will have to follow. Shares of E-Trade fell 2% on Wednesday following a 16% decline on Tuesday.

Analysts see consolidation may be the only way out for some players with E-Trade being the most likely acquisition candidate.

“We think AMTD is the likeliest acquirer of ETFC given the large expense redundancies and AMTD’s desire to catch-up to Schwab and Fidelity in the race for scale,” said Credit Suisse’s Siegenthaler.

—with reporting from CNBC’s Michael Bloom.