Will Charles Schwab (NASDAQ:SCHW) Trading Fee Cuts Initiate Discount Brokerage Price Wars?

The move by Charles Schwab (NASDAQ:SCHW) to cut its trading fees to $8.95 for each equity trade could precipitate a price war among discount brokerages, who have been struggling in a low interest rate environment. Most existing trades at Schwab are offered for $12.95.

As of January 19, the new fee will go into effect for clients of Charles Schwab.

Other brokerage services offered by the company have also been slashed in price, as phone trades have been trimmed from $17.95 to $13.95, while trades the are assisted by brokers will be cut from $37.95 to $33.95. The phone trade changes are in relationship to accounts of less than $1 million.

Part this comes evidently from lackluster trading from their larger clients, which haven’t seemed to be doing as much business lately. Consequently, trades prices for now will no longer be determined by the assets of the customers or the number of trades they make on a yearly basis. Schwab seems to have determined that even if there is some negative response from clients with huge assets, it isn’t enough to counteract their move to generate more trades among clients with less assets and lower trading activity.

This will place Schwab in the position of being the least expensive discount broker to do business with among the big companies, but it remains to be seen whether this will really make a difference among those who maybe only do a few trades a year, as it would only save them a few dollars over Schwab’s major competitors. Scottrade does continue to offer trades a $7 a pop.

For example, TD Ameritrade, their nearest low-price competitor once the fee changes are made, offers trades for $9.99. How many investor will change from Ameritrade to Charles Schwab to save a few dollars? And E Trade has been charging the same fees on their behalf, again, begging the question if it would make a difference to investors who have lower net worth and invest only occasionally throughout the year.

Ameritrade seems to be thinking the same thing, as their initial response to the brokerage fee cuts from Charles Schwab is they aren’t going to do anything as far as cutting prices goes.

That seems to tell me they’re going to take a wait-and-see attitude until the results from Schwab determine whether it would matter or not.

For others like E Trade, who have been struggling more, they may be forced to take a cut to ensure they don’t lose any more market share.

In a difficult economic environment though, you may just see investors flock to Schwab to save even a little more money on their trades. If that’s the case, you’ll see almost immediate response from its competitors to drop trading fee prices as well.

Schwab also announced in other company news that they would be offering managed exchange-traded funds (ETFs) to their clients, also starting on January 19. Included with tracking equities, they will also focus on commodities, real estate and Treasury Inflation-Protected Securities (TIPS). Clients will have to invest at least $100,000 to participate in these managed ETFs.