Multiple reports have indicated that stock brokerage company Charles Schwab is in talks to acquire rival TD Ameritrade in a deal worth $26 billion.
The news for the possible merger between stock brokerage companies Charles Schwab and TD Ameritrade follows announcements by both firms of plans to eliminate commissions for most online trades.
The removal of commissions for online trading would greatly benefit customers but analysts and investors are wondering how the companies are going to recover from the loss of these revenues.
Schwab decided to go zero commission several days after smaller rival Interactive Brokers Group announced that it was ending commissions. Schwab's decision started an immediate price war and other brokerage firms followed suit, including TD Ameritrade, E-Trade, Fidelity, and Ally Invest.
The trend toward zero commission trading can be attributed to competition from Robinhood, a trading app popular with millennials that launched a few years ago with a no commission business model.
In an interview last month, TD Ameritrade chief executive officer (CEO) Tim Hockey hinted on the possibility of selling the company. Hockey said: "We will always take a look at something that makes strategic sense."
Bill Capuzzi, CEO of Apex Clearing, a custodian firm that holds securities for brokerages, pointed out: "On the heels of all the zero-commission announcements, this was the inevitable next shoe to drop. A merger would make a lot of sense."
Capuzzi argued that a merger would have the potential for massive cost savings because of overlap in their respective businesses but it would also mean employee layoffs.
Following the reports, Schwab shares went up by 7% in early trading while TD Ameritrade's stock surged by more than 15%. Meanwhile, Interactive Brokers Group's stock went down slightly and E-Trade's shares fell by more than 6%.
The decline in E-Trade shares is attributed to the perception that the firm could be the odd man out in the merger process. Prior to these reports, it has been speculated for years that E-Trade could be a good fit for Schwab.
