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For months Ameritrade (NYSE:AMTD) CEO Fred Tomczyk has been hinting at “industry consolidation” and saying that the company is focused on domestic acquisition opportunities, and “does not want to buy someone else’s asset problems.” Translation? He wanted to see improvement in E*Trade’s (NASDAQ:ETFC) loan portfolio.

Since those comment, results at E*Trade have shown a month by month improvement in those portfolios.

From Marketwatch:

The move is reminiscent of price wars of years past and threatens to stress the industry’s bottom line when trading already is weak.

Schwab (NYSE:SCHW) shares fell more than 3%, and rivals TD Ameritrade (AMTD) and E-Trade (ETFC) also fell on a day that saw the broader financial sector U.S. financial stocks rose on Thursday.

Schwab said Thursday that starting Jan. 19 it will cut trading fees for its smaller clients. Investors with accounts of less than $1 million and who execute fewer than 120 trades a year will see their online trading fees cut to $8.95 per trade from $12.95 per trade.

The previous pricing also had additional charges for trades featuring more than 1,000 shares while the new pricing is for trades of all sizes.

There will still be a $5 surcharge for automated phone trades and $25 for broker-assisted trades. The new pricing is in line with what Schwab charges clients with more than $1 million or who execute more than 120 trades a year.

Just Tuesday, Raymond James downgraded shares of Charles Schwab Corp. and TD Ameritrade

Schwab went to market perform from outperform to reflect the increasing likelihood that the online broker’s earnings will “remain substantially depressed throughout 2010 and into 2011.”

The downgrade also reflects Raymond James’ updated forecast that the Federal Reserve won’t raise interest rates until 2011.

Schwab went to market perform from outperform to reflect the increasing likelihood that the online broker’s earnings will “remain substantially depressed throughout 2010 and into 2011.”

The downgrade also reflects Raymond James’ updated forecast that the Federal Reserve won’t raise interest rates until 2011.

And, last month, Schwab projected fourth-quarter profit below analysts’ estimates as the company said acceleration in money market fund fee waivers and a slowdown in trading volumes will weigh on its results. Read more about Schwab warning.

Now that Schwab (SCHW) is essentially declaring a commission price war, E*Trade and Ameritrade only really have two options. Lower their own commissions to avoid losing customers, (the most price sensitive customers are the most active traders and the most valuable) OR finally do what everyone thinks they will do and get together. In this instance, lowering the commissions will be offset by the huge increase in the customer base / cost reductions at combined entity.

My bet is that Ameritrade has been prolonging this because of either or all of the following:

a) they see themselves as the only bidder
b) they want any more write-downs of assets, if there are any on E*Trade books, not theirs post acquisition.
c) they hoped the unsettled CEO situation at E*Trade would cause them to become a motivated seller.

I’m pretty sure they did not see this coming. A prics war now will force the issue one way or the other. With trades down for all the brokers already, losing revenue per trade also might encumber Ameritrade’s ability to even do an E*Trade deal down the road, especially if they intend on using any stock in a potential deal (deteriorating results would lead to a lower stock price).

All that being said, I think it is time for a decision to be made. My guess? Ameritrade isn’t ready yet.

Disclosure: No positions

Source: Has Schwab Forced Ameritrade's Hand?