Morgan Stanley and E*Trade Financial Corp. were Wall Street opposites: One an investment banking firm with a historic pedigree that catered to corporations and the wealthy, the other a discount brokerage that had pioneered cheap online trading. Now they’re merging, for reasons that say a lot about how the U.S. financial landscape is being reshaped. After a decade in which Wall Street giants mostly stood pat, in part because of the fallout from the “too big to fail” bailouts of 2008, the desire to get even bigger is coming back.

1. Why is Morgan Stanley buying E*Trade?

Would it sound simplistic to say that the biggest reason is for its money? To be more specific, the $56 billion deposit base E*Trade is bringing. Deposits matter to Morgan more than most of the biggest U.S. banks. Unlike JPMorgan Chase, Bank of America, Citigroup or Wells Fargo, its history was solely as an investment bank until the 2008 financial crisis prompted it to branch out. Post-crisis regulations that discourage reliance on short-term borrowing and the low-interest rate environment that’s slashed what banks pay savers since then have made deposits the most coveted form of funding for all banks.

2. What are the other reasons?

One is young customers. Fittingly for a brand that made itself famous with commercials featuring stock-trading babies, the backbone of E*Trade’s customer base are millennials. Some of them will grow up to become the rich individuals that Morgan Stanley traditionally caters to, and the bank is counting on them to stick with the firm. Morgan Stanley Chief Executive Officer James Gorman said the purchase was also an investment in technology, as those millennials demand everything online or mobile, through easy-to-use interfaces. E*Trade has a powerful internet-based platform that Morgan Stanley can leverage to use for other financial products. The top four U.S. banks spend $38 billion annually in what amounts to a giant technological arms race.

3. Why is E*Trade selling?

It’s becoming an increasingly cold, cruel world out there for all but the biggest discount brokers. Commissions for trading stocks have been shrinking for decades, driven in part by technical advances. The final blow came in October when the largest discount broker, Charles Schwab Corp., cut fees to zero. A month later, the second biggest in the industry, TD Ameritrade Holding Corp., agreed to be acquired by Schwab, its larger rival. With zero commissions and its two bigger peers joining forces, E*Trade was facing a tougher market to compete in. Becoming part of a bigger franchise was probably seen as the way to survive.

4. What does the deal say about what’s happening in finance?

It probably means that the drive for consolidation isn’t over. Wall Street is having to annex parts of Main Street banking because the forces at play in this merger are making it very hard for anyone to survive by only catering to the ultra rich and big institutions. Morgan Stanley’s pushing to expand its retail brokerage and wealth management businesses by adding the merely well-to-do along with its traditionally rich clients. That’s in line with Goldman Sachs’s push to reach more types of retail clients through the online banking products it offers under the brand name of Marcus. Swiss rivals Credit Suisse Group AG and UBS Group AG have recently announced they will broaden the bases of their wealth management units. Competition from so-called fintech startups like LendingClub Corp. and Robinhood Markets Inc. also adds to the pressure to bulk up.

5. What does this all mean for consumers?

Day traders who use E*Trade’s platform will probably not feel anything has changed after the merger. They might get more offers for new financial products or services as Morgan Stanley tries to entice them to other parts of its empire. They can also rest assured that their trading platform isn’t going away any time soon, a prospect that was possible just a few months ago as the competition heated up among discount brokers. While paying no fees for share trading is good for the consumer’s bottom line, there might be negative long-term consequences as firms -- whether part of a bigger financial firm or independent discount brokers -- reduce services and customer support they provide clients who don’t utilize any other financial product their firm is offering them.

6. What has this meant for the shares of the companies?

After the announcement, Morgan Stanley shares fell while E*Trade shares surged. The acquisition is an all-stock deal which will dilute Morgan Stanley’s shares initially. Gorman acknowledged that it’s a strategic move which he argued will help future earnings and the franchise of his firm, though costs will exceed savings in the first three years. So the dilution matters in the short-term for Morgan Stanley shareholders, but in the long run, it can boost the firm’s value if the purchase pays off as targeted. E*Trade shares jumped naturally to match the premium that Gorman is paying for them. Prior to the announcement, the stock had lost more than 30% in the past two years.

• A QuickTake on zero-fee investing.

• A look back at the now-ending era of discount brokerages.

• The push by Goldman Sachs to be more like other banks.

• The merger of Charles Schwab and TD Ameritrade.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editors responsible for this story: Josh Friedman at jfriedman25@bloomberg.net, John O’Neil

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