On November 25th, Charles Schwab announced its takeover of TD Ameritrade in an approximate $26 billion deal. It is an all stock transaction; whereby TD Ameritrade stockholders will receive Charles Schwab shares in return. The merger creates an online broker with more than $5.1 Trillion in assets, moving it up just behind the other behemoths Vanguard ($5.7T) and Fidelity ($7.8T).
With the decision to no longer charge commissions for many equity and ETF trades by retail customers and investment advisors, consolidation is a must in the online broker world. With 57% of Schwab’s income (and 28% of TD Ameritrade’s) coming from net-interest margin, increased scale (and the reduced costs in the combined firm) will continue to allow Schwab to grow significantly. That scale will make the firm attractive to other brokers and market makers, which pay for order flow; and will create more opportunity within the online broker and adviser for its options and robo-adviser services. The jury is still out as to whether such scale will continue to serve retail investors.