(Reuters) - Charles Schwab Corp SCHW.N is in advanced talks to acquire TD Ameritrade Holding Corp AMTD.O, a person familiar with the matter said on Thursday, in a deal that could exceed $26 billion and combine the two largest U.S. discount brokerages.

The companies are hoping their combination, which is bound to be scrutinized heavily by regulators, will give them more scale to withstand the impact of the industry’s move toward zero commission for trades, the source said.

If the deal negotiations prove successful, the companies could announce an agreement in the coming days, the source added, asking not to be identified because the matter is confidential.

Schwab and TD Ameritrade did not respond to requests for comment.

Shares of TD Ameritrade surged 16% to close at $48.38, giving it a market value of $26.2 billion, after CNBC first reported on the potential deal. Charles Schwab shares ended 7.3% higher at $48.03, giving the company a market value of $61.6 billion.

Pressure on the discount broker business model has been rising in recent years, as companies spend more on their trading platforms to keep up with technological advances, while lowering fees to attract more customers.

With disruptors such as Menlo Park, California-based Robinhood Markets Inc rapidly gaining market share by eliminating stock trading commissions, large brokers were forced to do the same: Schwab was first last month, covering online trading of stocks, ETFs and options, followed by others such as Fidelity Investments, E*Trade Financial Corp ETFC.O and TD Ameritrade.

While the brokerage industry has benefited from the stock market rally of the last decade that has turned more mom-and-pop investors into customers, the deal could also signify that companies are now seeking to consolidate ahead of a potential market downturn.

Earning less from trading has placed increased focus on other possible revenue sources, in particular management of customer assets which these firms control.

Schwab earned about half of its more than $10 billion in revenue in 2018 from interest income.

The combined company would have assets of around $5 trillion, according to Reuters calculations.

The U.S. Federal Reserve’s three interest rate cuts this year have made income from investing customer balances less profitable.

“This is largely about scale,” Argus Research analyst Stephen Biggar said. “I believe a merger could present substantial cost synergies.”

FILE PHOTO: A Charles Schwab office is shown in Los Angeles, California January 29, 2016. REUTERS/Mike Blake/File Photo

ANTITRUST

While a potential deal could give Schwab an edge in the price war, it remains to be seen whether creating such a dominant player among discount brokers would escape scrutiny from antitrust regulators.

Under the Trump administration, oversight bodies have been more willing to approve big financial mergers: this week, the Fed cleared a combination of BB&T Corp BBT.N and SunTrust Banks Inc STI.N, in the largest bank merger since the global financial crisis.

However, while the United States has thousands of banks, the discount broker space is much more consolidated: for example, the combined company would have about 65% to 70% of investment account assets, according to a research note from KBW.

The timing of the transaction, so soon after the elimination of online trading fees by Schwab, could also raise questions about predatory pricing moves.

“Because Schwab just cut commissions to zero, then bid for their most hindered competitor, that could lead to legal challenges and will likely draw anti-competitive scrutiny,” UBS analysts wrote in a research note.

The combined company is expected to be led by Schwab’s Chief Executive Officer Walt Bettinger, according to CNBC.

This would solve TD Ameritrade’s leadership quandary: CEO Tim Hockey is due to step down in February, and no replacement had been named.

The deal could also force E*Trade, the third largest discount broker, to look for possible acquisitions. Shares of E*Trade were down nearly 5% following the CNBC report.