Meta's latest consumer-grade AI product has sent shockwaves through the market, intensifying a long-standing rivalry in the brokerage sector: the 55-year-old investment giant Charles Schwab Corp (NYSE: SCHW) versus Robinhood Markets Inc (NASDAQ: HOOD), the poster child for post-pandemic retail trading. Schwab shares tumbled 6% on Tuesday, hitting their lowest level since early July; since Meta unveiled Muse, the stock has now fallen more than 8% cumulatively.

Meanwhile, Robinhood shares climbed, once again setting a new 52-week high. The company had already rolled out its own AI agent back in May, capable of executing trades and managing portfolios on behalf of users. Wealth management platform LPL Financial Holdings Inc (NASDAQ: LPLA) dropped 7% on Tuesday; financial services firm Raymond James Financial Inc (NYSE: RJF) fell 3.5%; and Interactive Brokers Group Inc (NASDAQ: IBKR) slipped 1%. The Financial Select Sector SPDR Fund (XLF), which tracks the financial sector, declined 2%, now down 6% from its highs earlier this month. The high-interest-rate environment is also adding pressure to the sector.

This is not the first time an AI product has rattled this space. In February, tech platform Altruist launched its tool called Hazel, which generates tax-planning solutions for individual users and financial advisors — and the same cluster of brokerage stocks sold off in response. Over the following months, Schwab partially recovered, but LPL Financial shares never bounced back.

Jimmy Lee, founder and CEO of Las Vegas-based wealth advisory group managing $8 billion in assets, said: "Schwab finds itself in a particularly tricky spot. Within the advisor community, the perception is that it's leaning toward a wait-and-see posture, trying to figure out how best to defend market share. From a custodian's perspective, the direct competitive threat from Meta isn't as strong as what Altruist brings. But for financial intermediaries that earn fees from bill pay, statements, trade execution, and similar services, a massive disruption is looming."

Meta's AI assistant states it will neither execute trades on behalf of users nor offer financial advice. However, when asked how closely it could mimic the work of a financial advisor or brokerage, it listed several capabilities: tracking investments, monitoring progress toward goals, and analyzing how well the components of a portfolio fit together. Last week, Schwab's platform for registered investment advisors, Schwab Advisor Services, announced a partnership with Anthropic to build a dedicated version of Claude tailored for financial advisors. Back in May, the company had already launched an AI tool incorporating customized analysis from its research division.

A Schwab spokesperson declined to comment; Robinhood also declined to elaborate further. After plunging more than 40% in the first-quarter selloff earlier this year, Robinhood rebounded on Tuesday, bringing its year-to-date gain to 10%. The retail-focused brokerage, which also offers digital banking and advisory services, has surged roughly 1,200% over the past three years; Schwab is up 83% over the same period, while the XLF financial ETF has gained 65%.

Piper Sandler analyst Patrick Moley wrote in a research note back in April: "Artificial intelligence and tokenization are poised to dismantle the various friction points that traditional financial intermediaries rely on for profitability. Schwab, which depends heavily on its low-interest idle cash sweep business, is the most exposed."

Bearish bets against Schwab are mounting

Judging by options market flows on Tuesday, the AI threat to Schwab may be a long-term structural issue. According to CBOE LiveVol data, Schwab options volume hit five times its daily average, with put contracts bought nearly double the number of calls. The most active contract was the mid-January-expiring put with a $90 strike price, betting the stock falls another 13% over the next three months. Of course, there was also one significant counter-trade: a seller writing puts expiring October 16 at the $95 strike.

The sentiment in Robinhood's options market tells an entirely different story: traders bought twice as many calls as puts; of the $95 million in total premiums, more than 80% went into call contracts, with the most heavily traded being the $125-strike call expiring this Friday. Gav Braxton, founder of the well-known online trading community Wolf Financial, said in a phone interview: "Gen Z and millennials gravitate toward platforms like Robinhood and Public, so they can iterate products quickly. After the GameStop saga, Robinhood repaired its brand and built up enough user trust; now its AI agent can trade virtually every asset class."