TD Ameritrade Holding Corp. and E*Trade Financial Corp. are in merger discussions, which would create a dominant player in a highly fragmented industry, according to The Wall Street Journal.

E*Trade has 4.7 million brokerage and banking accounts, and TD Ameritrade has 6.3 million accounts. Their competitor, Charles Schwab, the current largest online broker, has around 6.9 million accounts.

A spokeswoman for E*Trade said the firm’s management team has consistently stated it believes there is “tremendous value in consolidation that aligns business strategy and operational synergies and will do what is in the best interest of its customers.”

“We have talked and continue to talk to peers in the industry,” said a TD Ameritrade spokeswoman.

The two companies have been in serious discussions for weeks, but aren’t close to a deal yet, according to people familiar with the matter. This is not the first time the two have discussed an alliance. either, but nothing ever managed to get worked out.

However, there is more pressure now, as two hedge funds have big stakes in TD Ameritrade, and have publicly urged the two companies to talk.

It is unknown how much the deal would be worth or how it would be structured, but one person familiar with the talks estimated a combined company could be worth $20 billion.

The recent credit crunch has added a small wrinkle in the talks, as E*Trade was hit with rumors that the quality of its mortgage portfolio, a growth engine for the company in recent years, was weak. The company’s stock dropped 28% last Thursday, but rebounded the same day. E*Trade assured the market that despite some volatility, “the financial health of the company is sound.”

A major issue being discussed is the need for the two companies to agree on a management team to run the combined entity, and what degree of control Ameritrade shareholder TD Bank would have once the two brokerages were combined.

Competition for low-cost trades is increasing. “Both companies are looking to add client assets and diversify their operations away from trading commissions, so on many levels a merger makes sense,” said Rich Repetto, an analyst at Sandler O’Neill & Partners.

A deal would put competitive pressure on Schwab. During a conference call with analysts in July, Schwab Chief Executive Officer Charles Schwab put the kibosh on any speculation his firm might merge, suggesting that its internal growth opportunities were superior to acquisition-related ones.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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