(Photo: ChristopherDilts/Bloomberg)

Charles Schwab is set to buyTD Ameritrade for $26 billion, which couldcreate a firm with some $5 trillion in client assets, according toa report from Fox Business.

The move comes as the brokeragebusiness has been racing to cut commissions to zero — which bothfirms moved to do last month. It also comes on the heels ofSchwab's plan, announced in July, to spend $1.8 billion on USAA'sbrokerage and managed portfolio accounts, which have some $90billion in client assets.

Schwab, which has about $3.7trillion in assets, and TD Ameritrade did not respond to requestsfor comment.

Since the pricing pressures started in early October, TDAmeritrade's stock price had weakened by about 11%; today, it rose24% to about $41.40 in pre-market trading.

Schwab and TD Ameritrade havesaid free trades are expected to reduce revenues, 3%-4% of netannual revenues for Schwab, 15%-16% of net revenues for TDAmeritrade.

But the move to zero commissionsrepresents "huge savings" for advisors' clients, making it a "hugedeal," according to industry recruiter and watcher Jon Henschen."More clients will ask, 'Why are we paying these ticket charges?Why not zero?'"

The larger question mark,Henschen says, concerns the response of the large clearing firms:"It will be interesting to see how clearing firms react to thisnews, and if we see downward pressure on Pershing and [Fidelity'sNational Financial Services], etc., to lower their ticket chargesto broker-dealers."

Effects of pricingpressures

Soon after E-Trade announced its embrace of zerocommissions, Fitch Ratings said no-commission trades "will pressure industryrevenues, further emphasizing the importance of net interest incomefrom accompanying bank sweeps, wealth management and investmentmanagement revenues, and will likely drive further industryconsolidation." 

Of the three brokerages, FitchRatings, rates only Schwab, which analysts Michael Taiano andDafina Dunmore believe is "better positioned to weather the declinein trading commissions than many of its competitors"  dueto its "scale and breadth of offerings."

Still Schwab's revenues, alreadyunder pressure from declining commissions, low interest rates andfalling fees for mutual funds and ETFs, will suffer, according tothe analysts' report.

"It  will beincreasingly important for Schwab to further improve costefficiencies while also growing client assets and exploringadditional sources of revenue from its sizable client base," theFitch analysts said. 

(Bernice Napach contributed to this report.)

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