Discount Brokerages to Merge in Blockbuster Buyout

2019-11-21 | Simpler Trading Team

Disruption continues in the world of discount brokerages with the announcement today that powerhouse Charles Schwab is buying competitor TD Ameritrade for $26 billion.

The blockbuster merger of the two largest discount brokers is being watched by retail traders who are enjoying a wave of zero-commission trades triggered by Schwab in October. Eliminating basic account trade commissions disrupted the industry as it forced others to follow, including TD Ameritrade.

TD Ameritrade brings to the merger $1.3 trillion in assets under management that adds to Schwab’s $3.85 trillion. Industry watchers noted that TD Ameritrade also adds value with 11 million clients worldwide and the thinkorswim® platform for retail traders.

thinkorswim® is the advanced trading software platform that supports traders in day-to-day investing while TD Ameritrade is the comprehensive investment and securities brokerage that started in 1975. TD Ameritrade acquired thinkorswim® in 2009 and has since integrated the platform as the brokerage’s feature trading platform.

thinkorswim® is a popular software platform with traders at Simpler Trading. The Schwab-TD Ameritrade merger will take time for approval and isn’t expected to present obstacles going forward for platform users.

Still, there are concerns about what happens next for traders as this surprise merger evolves.

David Starr, Vice President of Quantitative Analysis at Simpler Trading, said the primary reason for the buyout is likely not Schwab’s interest in thinkorswim®. Starr said Schwab could build a new platform for less than $26 billion, and the powerhouse already has in place StreetSmart Edge, Schwab’s proprietary trading platform.

Starr interprets the move as Schwab wanting to expand by acquiring the TD Ameritrade/thinkorswim® client base, thus bringing those clients into its fold of investors.

“It is unlikely Schwab will want to alienate those users,” Starr said. “Unless Schwab takes the unlikely step of alienating an important segment of the users they’re paying a lot of money for, I would expect they’ll want to continue providing thinkorswim® users with the most important features they’ve come to depend on.”

Like any day in the market, traders must weigh the pros and cons of the merger event.

“Suddenly you have a lot of choices under one umbrella whether you want to trade your own account or turn it over to managers,” said John Carter, Founder of Simpler Trading. “The downside is, for an active trader who may have lots of questions — you can become just a number to them.

“So that’s the trade off — more choices, less personal attention,” John said. “With a smaller broker you get less choices, but more personal attention.”

Retail traders always have the option to maintain separate trading accounts based on benefits of a brokerage.

“I prefer to split up my accounts across a few brokers,” John said. “I of course love thinkorswim®, and I’m hoping they get to ‘keep doing their thing’ post merger. It also makes me appreciate more my accounts at smaller brokers such as tastyworks® and TradeStation®.”

The merger announcement pushed both stocks higher at the close Thursday. SCHW closed up 7.34% at 48.03 and AMTD spiked 16.99% to 48.41.

Schwab would also take on a TD Ameritrade workforce of 10,000 people that is bolstered by 7,000 registered investment advisors.

Highlights of the Schwab-TD Ameritrade merger deal:

  • Two largest discount brokerages set to merge
  • Schwab continues disruption of discount brokerage market
  • Merger creates $5 trillion powerhouse

Simpler Trading team thoughts on merger:

  • Schwab buying access to 11 million TD Ameritrade clients
  • More choices for trader under an umbrella of larger company
  • Bigger company means smaller traders could become just another number

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