Most writers are treating the $13 billion deal as the Wall Street absorption of financial technology. But it’s also the other way around. Brokers that have made their money through people are surrendering to the reality that people aren’t needed anymore.
The deal, which needs antitrust approval, comes with a $375 million break-up fee, which E*Trade would pay the bigger bank if it walks away. Morgan Stanley would owe the fintech name $525 million if it terminates the deal over antitrust concerns.
After quickly rising over 20% on the news, E*Trade opened Feb. 24 near $50 per share. Morgan Stanley dropped 4% on the news. The coronavirus from China is also weighing on the markets, as authorities in Italy and South Korea confirm infections.
No More Wall Street
The “trading floor” at the New York Stock Exchange has been a news set since 2012. Very little trading happens there. Floor traders participate in initial public offerings and help with big imbalances but trading itself is computerized.
The result is that technology is eliminating jobs on Wall Street just as it is everywhere else. It’s not just traders and brokers who are hitting the bricks. Automation could eliminate 1.3 million financial jobs this decade.
But simply automating isn’t a solution. Discount brokers, too, must keep up with technology trends that are constantly lowering costs. Trading is switching from mainframes and PCs to clouds and apps.
For E*Trade, the Morgan Stanley deal is a way to get out from under a price war that began when Robinhood, a fintech startup, launched its zero-fee stock trading app in 2014. Five years later, it completed a funding round that valued it at $7.6 billion.
Robinhood’s IPO is now one of the most anticipated deals of 2020. But reporters are also asking how Robinhood will keep down churn, making the site “sticky” with social features so it can grow into its valuation.
Discount brokers, who began appearing in the 1970s after the U.S. Securities and Exchange Commission deregulated agent fees, now face enormous costs in moving to new platforms. To get that money they’re creating scale through mergers. The E*Trade deal comes just two months after Charles Schwab (NYSE:SCHW) said it will pay $26 billion in stock for TD Ameritrade (NASDAQ:AMTD).
Money Meets Programmers
For banks and brokers, dealing with fintech means disgorging billions to buy deal flow and programmers. While E*Trade is behind Robinhood in automation, Morgan Stanley is still paying almost 4.5 times revenue for it. The Schwab-Ameritrade deal comes in at about 4.9 times revenue.
The financial press is writing gleefully how deals like this are the “death knell” for discount brokers. But it’s really the other way around. People with a financial background are being replaced by programmers and their software.
The trend has been going on for decades and has only accelerated in the cloud era. Even smaller companies like eToro, Trading 212 and Betterment are now coming after Robinhood. If Morgan Stanley can’t keep costs down, it could find itself buying air with its E*Trade purchase, as young traders move to cheaper platforms.
The Bottom Line on MS Stock
E*Trade is offering Morgan Stanley a lifeline into the fintech world, but Morgan Stanley is also offering E*Trade a lifeline.
As the cost of moving money continues its march toward zero, banks and brokers become tech companies. The assets of Morgan Stanley will shield E*Trade from the costs of its own evolution. The E*Trade deal will bring Morgan Stanley closer to the customers it needs to survive.
Survival is at stake, and the fintech war has just begun.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in SCHW.