Price wars are exciting things to behold. It’s a literal chase to the bottom as competing companies fight for something other than profit margins: Popularity. It’s an incredible thing to watch unfold.
The most recent demonstration of this is E*TRADE: The trading firm eliminated all commissions for online trading on specified stocks and funds. This was just hours after Charles Schwab and TD Ameritrade did the same. On top of that, E*TRADE released a statement that it’s slashing other fees as well. It is cutting down their charges on options to a measly $0.65 per contract. Its active trader price will remain at $0.50 after the Seventh of October.
They lowered investing barriers, with the new minimums for Core Portfolios and Prebuilt Mutual Fund Portfolios clocking in at $500. A new minimum for automatic investing recurring deposits has been established at just $25. Chief Executive Officer of E*TRADE, Mike Pizzi, released a statement that the company is going to lose a massive $75 million in projected quarterly revenue. Or, in other words, about three percent of its total net revenue.
This incredibly expensive price war between these firms was jumpstarted by Interactive Brokers, with them introducing IBKR Lite. This new platform provides a commission-free format, coupled with unlimited trades for ETFs and US stocks.
Costs of Price War
Along with this projected revenue loss from E*TRADE alone, shares within the firms Charles Schwab, E-Trade Financial and TD Ameritrade have all been traded down. It shows that investors aren’t impressed with this new format of warfare. The profitability of these companies has naturally dropped, making their respective investors nervous about what bold new move will happen within this conflict.
Capitalism Done Right
This is a testament to how relentlessly effective a capitalist market can be. As demand relentlessly rises for ETFs that are affordable, more and more companies come in, trying to get their share of the pie. When there is no monopoly, there is competition, and competitors will do their very best to outdo the other in this perceived war of sales.
Slowly, more and more “extreme” measures must be taken by the company, sacrificing their profit for the consumer’s benefit. This particular war started when FinTech firms began to emerge, the most famous being RobinHood. These new entities set a new precedent, where the sheer amount of demand made it possible to profit with fewer costs to the consumer.
A similar ideology was adopted as far back as the 1800s. A dark time for food preservation within the US as large companies added the cheapest, and usually most poisonous, substance to food products to ensure long shelf life. Harvey Wiley, a chemist at the time, experimented to determine its health effects. He believed that, if fewer people became sick from the food they ate, they would buy more. This would overtake the costs that would require adding healthier preservatives. Before this, Americans would ingest things like formaldehyde, borax, and salicylic acid is dangerous, sometimes lethal, amounts.