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Online brokers are facing off in a new price war, and the stocks are getting hammered.

Charles Schwab (ticker: SCHW) announced Tuesday that is eliminating commissions to trade stocks, exchange-traded funds, and options. The move comes a few days after Interactive Brokers (IBKR) said it would launch a new “lite” service for clients who wish to trade stocks commission-free.

Schwab’s stock was down about 9% in morning trading. Rivals TD Ameritrade Holding (AMTD) and E*Trade Financial (ETFC) were taking it much worse; TD was down 21% and E*Trade declined 19%. Interactive Brokers was falling 8.2%.

The steep selloff reflects fears that it won’t be long until commissions go to zero across the board, wiping out critical sources of revenue in a race to the bottom.

“We expect this move is going to take a significant toll on the e-broker sector today,’ wrote Wells Fargo analyst Christopher Harris in a note on Tuesday morning. “There is no way to sugar coat this development. We were hoping the challenging macro environment...would prevent the industry from competing on price like this but that is clearly not what is happening.”

Harris estimates that commissions represent 27% of total revenue for Interactive, 25% of revenue for TD, and 17% for E*Trade (ETFC). Trading commissions are only 3% to 4% of total revenue for Schwab, which the firm estimates will impact $90 to $100 million of quarterly revenue, according to Harris.

That may not sound like a big hit for a company with more than $10.7 billion in annual revenue. But it doesn’t come at a good time for the industry. Schwab and other brokers have become increasingly reliant on interest income earned from cash deposits by customers. As rates have come down, those margins are getting squeezed. Schwab recently announced a round of job cuts, partly in response to lower rates.

Schwab said it would reduce commissions on U.S. stocks, ETFs, and options that are traded online from $4.95 to zero, effective Oct. 7. Options will still cost 65 cents per contract. The last time Schwab cut commissions was in 2017, taking them from $8.95 to $4.95.

A Schwab spokesperson tells Barron’s there will be no restrictions on the number of trades. That would make Schwab the first full-service brokerage firm to wipe out stock trading commissions online, with no minimum requirements. “This is our price. Not a promotion. No catches. Period,” said Schwab CEO Walt Bettinger in a statement.

Other firms impose tiers and limits. Merrill Edge, the discount brokerage division of Bank of America (BAC), offers 100 free equity trades a month for customers with a banking relationship and at least $100,000 on deposit with the firm. JPMorgan Chase (JPM)’s new trading platform, You Invest, offers 100 free trades a year or unlimited trading with a higher tier banking or advisory relationship.

Schwab chief financial officer, Peter Crawford, said in a commentary that Schwab chose to act proactively because it’s seeing new firms enter its market, using zero or low commissions “as a lever.”

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“We’re not feeling competitive pressure from these firms...yet,” he said. “But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants.”

Nonetheless, this doesn’t bode well for Schwab’s stock or shares of the other discount brokers.

“Since SCHW is the market leader, this is a significant development and will likely force peers (Fidelity, AMTD and ETFC) to reduce their own commission rates,” wrote Harris.

Harris maintained his outperform rating on the stock, noting that Schwab remains “a premier company in mass affluent retail brokerage and is one of the best asset gatherers among U.S. financials.”

Write to Daren Fonda at daren.fonda@barrons.com