A see through piggy bank with money coins

An escalating price war in the U.S. retail brokerage business is negative for leading online brokers, says a recent report from New York-based Moody’s Investors Service.

A move by JPMorgan Chase & Co. (JPM) to offer free stock and ETF trading for do-it-yourself retail investors will hurt the major online brokers — TD Ameritrade, E*TRADE Financial Corp. and Charles Schwab Corp. — “because it raises the pressure to follow with their own commission price reductions or risk losing market share,” the report states.

The two most vulnerable firms are TD Ameritrade, “because of its greater dependence on commissions,” and E*TRADE “because it lacks the scale of Schwab and the more defensible product mix of TD Ameritrade,” the report states.

JPM’s announcement follows industry-wide commission reductions that were driven in part by an announcement from Boston-based Fidelity Investments Inc. that it will soon offer a pair of mutual funds that charge 0% in expenses.

“Retail brokers could face credit negative revenue declines should they be compelled to decrease or eliminate commissions entirely following new pressure from traditional competitors, including Fidelity, and nontraditional ones such as the large banks,” the report states.

Historically, retail brokers have been able to maintain their competitive position in the face of upstart firms offering a zero-commission model, because they offer superior client tools and product offerings allowed them to charge a premium.

“Now that JPM is leading the charge with more competitive pricing, the retail brokers’ premium may be challenged by their clients,” the report states. “JPM’s scale, large customer base and technology and advertising spending capabilities introduce a significant threat to the trading businesses of the retail brokers.”

Additionally, with interest rates rising, client assets become more valuable, intensifying the pressure to compete for those assets. This factor will also boost the retail brokers’ nontrading revenue, “which might offset a portion of their forgone trading revenue, should they reduce or eliminate trading commissions,” the report states.