GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Why Charles Schwab’s Purchase of OptionsXpress Makes Sense

March 26, 2011 | About:
insider

Dr. Paul Price

90 followers
Many will debate the wisdom of Schwab’s purchase of OptionsXpress but the logic is obvious if you understand the biggest problem associated with brokerage firm mergers. What factor is that? Buying up existing clients of other firms only works out long-term if you can hold on to the accounts post-merger.

When the OptionsXpress customers are transferred to Schwab’s books they will be focuses on two major things in deciding whether to stay put or flee to another brokerage house. The first concern is their ability to continue trading on the same familiar platform with the same features they’d been accustomed to using. The second big question is whether they will be paying more in commissions and fees under the new umbrella.

Because OptionsXpress is geared to option trading their platform is superior to Schwab’s in most ways. Schwab is likely to keep OXPS’s systems in place and let its own customers benefit from the improved features. No problem with point #1 then in terms of having OptionsXpress clients stay with the merged company.

Schwab is among the more expensive discount brokers for both stock and option trading. They give a higher level of service than most and charge more than others as well. Their standard fees are as follows…

1072341537.jpg

At $8.95 flat for stocks and $9.70 minimum for the first options contract they are much more expensive than TradeStation, InteractiveBrokers, TradeKing, and most other deep discounters. If they had acquired any of their lower-priced competitors the traders they picked up in the merger would likely have fled to avoid the higher Schwab commission rates.

The good news for Schwab and OptionsXpress clients? OXPS is one of the few discounters that was charging even more than Charlie for both stock and option commissions. Here are their posted rates…

1104799373.jpg

In fact, if you were not an ‘active trader’ according to OXPS’s definitions, your stock trading was at a flat rate of $14.95 and from 1 – 10 options contracts cost a flat rate of $14.95 per trade.

When OptionsXpress customers are moved over to the new parent company they will have cheaper trading than currently and should have no complaints. This is what really makes this particular acquisition look so good for Schwab. They have an excellent chance of holding on to almost all the transferred accounts through better service, keeping the best of each platform and the prospect of slightly lower costs for the new Schwab clients than they were paying before.

This looks like a cost effective move for Schwab that should work out well over time.


_____

Dr. Paul Price www.BeatingBuffett.com www.OptionsProfits.com

About the author:

Dr. Paul Price
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.9/5 (7 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK