<p>The service of making money by talking to people took a new hit when Morgan Stanley (NYSE: MS) said they will buy E * Trade (NASDAQ: ETFC).
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Most writers treat the $ 13 billion deal as Wall Street‘s absorption of financial technology. But it is also the opposite. Brokers who have earned their money through people surrender to the reality that people are no longer needed.
The deal, which requires antitrust approval, comes with a split fee of $ 375 million, which E * Trade would pay the larger bank if it goes away. Morgan Stanley would owe the fintech name $ 525 million if it closed the deal due to antitrust issues.
After rising above 20% in the news, E * Trade opened close to $ 50 per share on February 24. Morgan Stanley dropped 4% on the news. Coronavirus from China also weighs on the markets, as authorities in Italy and South Korea confirm infections.
No more Wall Street
“Trading Floor” on the New York Stock Exchange has been a novelty since 2012. Very little trading takes place there. Floor traders participate in IPOs and help with large imbalances, but trading is computerized.
The result is that the technology eliminates jobs on Wall Street just as it is everywhere. It’s not just traders and brokers hit the bricks. Automation can eliminate 1.3 million financial jobs this decade.
But simply automation is not a solution. While discount brokers must keep pace with technology trends that continually reduces costs. Trade shifts from mainframes and computers to clouds and apps.
For E * Trade, the Morgan Stanley deal is a way out of a price war that began when Robinhood, a fintech startup, launched its zero-fee stock app in 2014. Five years later, it completed a $ 7.6 billion round of financing .
Robinhood’s IPO is now one of the most anticipated deals by 2020. But reporters are also asking how Robinhood will keep the churn down, making the site “sticky” with social features so it can grow in value.
Discount brokers, which began to emerge in the 1970s after the US Securities and Exchange Commission deregulated agency fees, are now facing huge costs of moving to new platforms. To get that money, they create scale through mergers. The E * Trade deal comes just two months after Charles Schwab (NYSE: SCHW) said it would pay $ 26 billion in stock for TD Ameritrade (NASDAQ: AMTD).
Money meets programmers
For banks and brokers, managing fintech means giving away billions to buy business flow and programmers. While E * Trade is behind Robinhood in automation, Morgan Stanley still pays almost 4.5 times the revenue for it. The Schwab-Ameritrade deal amounts to approximately 4.9 times revenue.
The financial press is writing how happy business as this is the “death” of the discount brokers. But it is really the opposite. People with a financial background are replaced by programmers and their software.
The trend has been going on for decades and has only accelerated in the cloud age. Even smaller companies like eToro, Trading 212 and Betterment are now coming after Robinhood. If Morgan Stanley can not keep costs down, it may find itself buying air with its E * Trade purchase, as young traders move to cheaper platforms.
The conclusion on MS stock
E * Trade offers Morgan Stanley a lifeline into the fintech world, but Morgan Stanley also offers E * Trade a lifeline.
When the cost of transferring money continues his march toward zero, banks and broker technology. Morgan Stanley’s assets will protect E * Trade from the costs of its own development. The e-commerce deal will bring Morgan Stanley closer to the customers they need to survive.
Survival is at stake and the fintech war has just begun.
Dana Blankenhorn has been a finance 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 in the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. At the time of writing, he owned shares in SCHW.