Is a price war heating up among retail brokerage firms?

Fidelity Investments announced Tuesday that it is eliminating its tiered pricing system for online trades, offering all customers a price of $7.95 per trade. Under the old system, customers paid anywhere from $8 to $19.95 per trade depending on asset level and trading volume. The company also announced a new partnership with asset manager BlackRock offering commission-free online trades for 25 iShares ETFs, including the iShares S&P 500 Index Fund and the iShares MSCI Emerging Markets Index Fund. The changes take effect on Wednesday.

Fidelity s move closely follows a similar announcement from Charles Schwab on Jan. 7. Schwab also eliminated tiered pricing effectively reducing the online trade fee for customers who make fewer than 120 trades a year from $12.95 to $8.95 and offering eight new Schwab Managed Portfolios ETFs. Fidelity s change is probably a direct reaction to what Schwab announced back in January, says Patrick O Shaughnessy, an analyst at Raymond James who covers Schwab and E*Trade Financial Corporation.

Many of Fidelity s 12 million retail customers could see a 60% reduction in trading fees as a result of this change, says James Burton, the president of the company s retail brokerage business. Burton says the change is a response to customer feedback not to Schwab s price reduction. During these difficult economic times, our customers let us know that they were more sensitive to commissions and to fees in general, and so we re very happy to be able to respond to that, Burton says.

Schwab focuses on offering customers a good value, says David Weiskopf, a spokesman for the company. We ll always look at our price if it s competitive and compelling and make sure that our investors are getting good value for it, Weiskopf says. We certainly appreciate Fidelity following our lead in terms of their ETF offerings and their price adjustments, he says. E*Trade Financial, for its part, will continue to study the market in light of the recent competitive moves, a company spokeswoman said in a statement.

The companies may say they re simply giving customers what they want, but do these announcements signal the beginning of a new price war? Certainly, price competition is heating up, says Bill Tanona, an analyst with Collins Stewart, LLC. However, TD Ameritrade and E*Trade aren t likely to lose retail customers over relatively small price differences, says O Shaughnessy. Most people aren t willing to switch brokerage firms simply to save a dollar on trades especially when they re only making five or six trades a year, he says.

Where Fidelity may have a competitive advantage is with its new partnership with BlackRock. While Schwab also offers commission-free trading of its own ETFs, the iShares ETFs that Fidelity can now offer commission-free have greater liquidity, Tanona says.

Shares of TD Ameritrade, Schwab, and E*Trade all slipped slightly following Fidelity s announcement. (Fidelity is not publicly traded.) The pricing change isn t as dramatic as it seems in terms of these companies bottom lines, however, because the majority of their trading volume comes from very active traders who already enjoyed lower prices per trade, O Shaughnessy says.