Now that Vanguard has joined Fidelity Investments and Charles Schwab (SCHW) in slicing commissions for stock trades and exchange-traded funds, the brokerage industry faces a new question: Will the little guys get hammered?

It really puts the pressure on the smaller firms, like Scottrade or TradeKing, says Sean Cunniff, a research director at TowerGroup focusing on brokerages and wealth management. Smaller players had relied on low-cost trades as part of their competitive advantage, he says. (Scottrade and TradeKing charge $7 and $4.95 a trade, respectively.)

Now, as larger firms level the playing field, investors may find smaller brokerages less attractive. Larger firms like Fidelity or Schwab can absorb commission cuts more easily and are also able to offer more functionality and more products, Cunniff says. I think the larger firms are going to come out of this stronger, he says.

TradeKing hasn t seen the rate of growth in new accounts slow since Fidelity lowered its trading fees, according to CEO Don Montanaro. We think it s good for the whole industry to have straightforward pricing policies, Montanaro says. While larger firms have dropped prices recently, none of them dropped down to my level, he says. A spokeswoman for Scottrade said that the company s ETF offering is very competitive in terms of price and overall value, including research and tools for investors.

Of course, Vanguard s larger peers may find themselves making changes, as well. With a price war on, brokerages and ETF providers could form more partnerships that allow for lower trading fees, like Fidelity s recently-announced deal with iShares, says Tom Lydon, the publisher of ETFTrends.com, an ETF research platform from Global Trends Investments.

ETF providers like State Street (STT) could make some of their own changes. Providers may choose to help brokerages offer commission-free trades of their products, Lydon says. Those ETF providers are also trying to compete for more assets, he says.

In the new environment, providers may also find they have to lower their operating costs. Because Vanguard s ETFs have relatively low expense ratios, other ETF providers may also feel pressure to lower the cost of their products, Paul Justice, the associate director of ETF research at Morningstar, says. Vanguard s decision to hold down costs has been a great disruptor in the mutual fund world, and the company could have a similar impact on ETF cost structures, he says.

Some brokerages may find the transition more difficult. Because Vanguard is owned by its investors and isn t publicly traded, other companies may simply be unable to match their prices, Cunniff says.

Vanguard s announcement was the latest salvo in an ongoing price war among discount brokerages. In February, Fidelity announced a flat fee of $7.95 for all equity trades. Schwab rolled out a comparable fee of $8.95 in January.

Vanguard investors can now trade the company s 46 ETFs commission-free. They are also subject to lower trading costs for equities and non-Vanguard ETFs. Individuals with less than $50,000 invested with the firm will pay $7 for their first 25 trades each year, and individuals with more than $500,000 invested will pay just $2 a trade.

In cutting its fees Tuesday, Vanguard, which had been best known among investors as a mutual-fund company, became the brokerage with the largest selection of commission-free ETFs, eclipsing Fidelity and its menu of 25 iShares funds. The firm is trying to show that they have a very competitive brokerage platform, Lydon says.

A spokesman for Fidelity said the company doesn t comment on competitors actions, but that it focuses on providing value to investors by partnering with the leading ETF provider, BlackRock, as well as offering a variety of independent research and financial planning tools. A spokesman for Schwab said competitors were imitating the company s pricing moves.

ETFs were initially marketed to institutional investors, but since the market downturn, retail investors have grown increasingly skeptical of actively-managed mutual funds and gravitated toward ETFs that allow them to at least match market performance themselves, Lydon says. Vanguard s announcement underscores a trend toward fee-free ETF trading as retail investors focus increasingly on cost, he says.

Highly active traders may be less likely to embrace Vanguard s products. The company reserves the right to limit trades for investors who buy and sell the same ETF more than 25 times in a year.