Another Obituary for Wall Street

October 2, 2019

On May 1, 1975, the United States stock market ended some 180 years of fixed-commissions on stock trades and entered the era of discount commissions. Despite threats by the venerable New York Stock Exchange to expel members who cut their rates or to sue the Securities and Exchange Commission, May Day came and the old ways went.  Much of the credit for that historic transformation goes to Charles Schwab, who founded the brokerage firm that bears his name in 1971 and fought a virtually one-man war against fixed commissions.  Some predicted the death of Wall Street within a few years of 1975.  Nearly half a century later, Wall Street survives, albeit, some would argue, on life support.

Zero Schwab

On October 1, 2019, Charles Schwab & Co. issued what may well be viewed as the final nail in the coffin of Wall Street's FINRA model of retail broker-dealers.As set forth in pertinent part in "In Conjunction With Chuck Schwab's New Book "Invested, " Schwab Removes the Final Pricing Barrier to Investing Online by Eliminating U.S. Stock, ETF and Options Commissions" (Schwab Press Release) :

Charles Schwab & Co., Inc. is removing the final barrier to making investing accessible to everyone by eliminating commissions for stocks, ETFs and options listed on U.S. or Canadian exchanges,across all mobile and web trading channels1. Clients trading options will continue to pay 65 cents per contract. 

. . .

Beginning October 7, 2019, the company will reduce U.S. stock, ETF and options online trade commissions from $4.95 to zero. And with no minimum account size3 to open a full featured Schwab brokerage account, every investor, no matter how large or small, can benefit from the expertise and support of a firm that has been entrusted with more than $3.7 trillion in client assets. Every Schwab client using our web and mobile channels automatically qualifies for the new pricing, without opening a new account, making a new deposit or maintaining a minimum balance of any type. . . .
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Footnote 1: The standard online $0 commission does not apply to foreign stock transactions, large block transactions requiring special handling, restricted stock transactions, transaction-fee mutual funds, futures, or fixed income investments. Options trades will be subject to the standard $.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, and Stock Borrow fees still apply. See the Charles Schwab Pricing Guide for Individual Investors dated October 7th, 2019 for full fee and commission schedules.
. . .

Footnote 3: No account minimums for domestic retail brokerage accounts other than Schwab One Organization accounts.

From the folks who brought us discount commissions, we now have zero commissions. No . . . Schwab is not the first to advance this pricing model, but given the firm's stature, its announcement has sent shivers among its competitors. Reports of Wall Street's demise are again circulating. This time, however, there's a bit more substance to those fears, at least when it comes to the economics of running a FINRA member firm. As noted in part in "Charles Schwab is ending commissions on stock trading and the brokerage shares are tanking" ( / October 1, 2019), following the issuance of Schwab's zero-commission press release:

Shares of Schwab fell 9.7% on fears the change will hit margins. The broker said commission fees make up 3% to 4% of net revenue each quarter. Rival brokerage firm TD Ameritrade plummeted 25.8% for its worst day in 20 years. E-Trade shares cratered 16.4% for its worst day since 2009.


From the onset of decimal stock quotes by April 9, 2001, the so-called "chop" that once existed for broker-dealers who made markets has literally been decimated from the once cushy quotes of 1/8, 1/4, and the like. Now there's no chop and no commissions. Who will survive and how? Two trends emerged over the last couple of decades: the big Wall Street firms got bigger (and accumulated more power) and the small firms vanished. From a high of about 6,000 FINRA member firms in 1999, by 2007, that number had dipped below 5,000, and by 2015, that number had further declined to under 4,000; and in 2019, FINRA membership has shrunk to under 3,600 member firms. We now have more FINRA employees than member firms! ("Visualize yourself as one of our 3,600 smart, dedicated and passionate employees . . ." at

Equo ne credite, Teucri. Quidquid id est, timeo Danaos et dona ferentes

In fact, there are many causes that have contributed to the erosion of FINRA's member firms. As David Sobel, Esq. so eloquently argued over six years ago in "Small Firms Try to Reform FINRA" (Side Bar with Bill Singer / Guest: David Sobel, Esq / July 11, 2013), some of the blame is on the member firms who stood on the sidelines afraid to speak up; and some of the blame is on a failed self-regulatory approach that punishes misconduct without an equal effort towards nurturing good compliance practices. Sadly, Sobel was a modern-day Laocoon, and despite his warnings, FINRA's small member firms foolishly wheeled the Trojan Horse into their midst. 

Resilient Capitalism (?)

With the advent of zero commissions, smaller FINRA retail member firms face an existential threat. Where will they find the revenue to keep their doors open -- what can they offer to retain their customers? If the future is to migrate onto the Registered Investment Advisor platform, how many more FINRA member firms can still make that transition before the RIA sector collapses under the weight of too many participants?  And what are we to make of the advent of Robo-Advisors and the fee reduction that emanates from such an algo-based model? 

If nothing else, Wall Street has proven a resilient patient, even when it winds up in the ICU. Similarly, change is not always bad and destruction is often a creative opportunity. I have no doubt that Wall Street will survive zero commissions as it survived May Day. Capitalism tends to find a way. That being said, it's time for FINRA to seriously tackle the issue of declining membership; and it's also important for the self-regulatory-organization to be an attentive midwife as the industry gives birth to a new paradigm.