Almost all of the major brokerage firms, Charles Schwab, E-Trade, Interactive Brokers, and TD Ameritrade cut equity-trading commissions to zero this week, with Fidelity and Vanguard the only hold outs for now.
While our knee-jerk reaction as traders is positive, I believe this could be a harbinger of a recession.
What is likely happening is that major brokerage firms are borrowers over the short-term repo markets. The repo markets are in turmoil as liquidity has dried up. The Federal Reserve has stepped in to bail out the repo markets to the tune of more than $200 billion over the last few weeks. Next week, the bailouts mature which means they must be paid back:
Sep 24: $30 billion, matures on Oct. 8
Sep 26: $60 billion, matures Oct. 10
Sep 27: $49 billion, matures Oct. 11
I think what’s happening is that as credit conditions in the repo markets tighten, the major brokerage firms that borrow in these markets are in desperate need of liquidity and so they just want traders and investors to sign up with them and park their money. It can’t be a coincidence that during a rare repo market bailout by the Fed, brokerage firms suddenly are so desperate for investors that they are waiving all trading fees.
The other bad result of brokerage firms cutting their fees to zero is the negative impact it will have on their quarterly earnings report and ultimately the number of people these firms will have to layoff.
We just got the news on Sunday, October 6, 2019, that HSBC is laying off 10,000 people in an effort to reduce costs.
Lipper Alpha Insight’s fund asset groups, including mutual funds and ETFs, show 3Q net inflows of money market funds increased by $221.5 billion, and for the year, rose to $349.7 billion. Senior research analyst at Lipper Pat Keon CFA said, “money market funds have not seen this level of net inflows since the global financial crisis.“
Corporate media groups owned by Comcast, Turner, CBS, and National Amusements, are telling their audiences that the bull market is likely to keep right on going but Lipper reports that Q3, equity fund flows were -$72.8 billion, and year to date net outflows of around -$125.6 billion.
In this light, brokerage firms cutting rates to zero sounds more like a possible precursor of a Black Swan event in markets than it does normal competitive behavior in a bull market.