||Rising Trading Volumes to Give Online Brokerages a Boost
Online brokerages are likely to post their highest trading volume in nearly two years in their quarterly results expected later this month.
Firms such as Charles Schwab Corp., E*Trade Financial Corp. and TD Ameritrade Holding Corp., which generate revenue from trading fees and commissions, stand to benefit from a strong month of trading in May and a stock market that rose about 2% over the past three months, climbing to record highs.
Higher market volatility spurred, in part, by concerns about the possible end to the Federal Reserve's economic-stimulus program also led to more buying and selling of stocks and bonds.
"This is the best trading environment we have seen in a while," said Wells Fargo Securities analyst Christopher Harris in a recent note to clients.
Reflecting some of that sentiment, Sandler O'Neill + Partners analyst Richard Repetto said daily average revenue trades, or DARTs, a measure of trading volume, for TD Ameritrade, the U.S. largest discount brokerage in terms of trading volume, will climb about 4% in its fiscal third quarter to 392,281, and rise 10.5% from a year ago. The company reports on a fiscal calendar, so it's one quarter ahead of the others.
The quarterly projection would be TD Ameritrade's highest reported trading volume since its fiscal fourth quarter in 2011, but it's "by no means a record" Mr. Repetto said, as the Omaha, Neb. company has reported DARTs above 400,000 in "four other quarters prior."
Even so, higher trading activity would be a welcome development for TD Ameritrade, which generates roughly 40% of its quarterly revenue from the trading business, and could help the company post earnings growth of roughly 14% in its fiscal third quarter, analysts say.
The discount brokerages, along with banks and exchanges, have been hurt by a more than three-year slide in stock-trading activity from individual investors and institutional clients, such as hedge funds, due to a slow-moving economic recovery and fiscal turmoil in Europe.
TD Ameritrade, Schwab and E*Trade have also faced a double whammy of sorts the last four years as low interest rates have cut into their ability to earn interest from assets under management and forced them to take other drastic actions.
In particular, Charles Schwab, which is more reliant on its financial advisory business than its trading operations, has waived billions in fees on money market funds so that clients' yields wouldn't turn negative.
Expectations of higher rates has bolstered shares of Schwab, Ameritrade, and E*Trade, which are all up at least 50% so far in 2013.
But relief has already come, at least in the short term, on the trading front.
In April and May, investors watched the Dow Jones Industrial Average reach record levels and began to "chase the market," said Evercore analyst Chris Allen, who last week boosted his earnings estimates on Ameritrade and Schwab by three cents and a penny, respectively, to reflect "better than expected trading activity." He now expects Ameritrade to earn 32 cents in the quarter, while Schwab could report 19 cents.
Don Montanaro, chief executive of TradeKing Group Inc., a Fort Lauderdale, Fla. online brokerage, said "tempered enthusiasm is how we look at the quarter," partially due to a seasonal slowdown in trading activity that began in June.
Meanwhile, those investors who continued to trade began to fret that the Federal Reserve will soon pare back its quantitative-easing program, in which it buys $85 billion each month in mortgage-backed securities and longer-term Treasury bonds.
"Even though volatility picked up in June, it kept perhaps some clients engaged in the markets that may have otherwise gone away, but it didn't contribute to any kind of uptick in volume," Mr. Montanaro said.
Indeed, Mr. Repetto's DART outlook already projects trading activity declined by 10% last month.
That leaves the future trajectory for volume very much in question.
"The third quarter is always the slowest quarter of the year," Mr. Montanaro said, adding that "a news event can always jolt the entire world back into engagement and that can happen at any moment."
Representatives for Charles Schwab and TD Ameritrade declined to comment. An E*Trade spokesman didn't immediately respond to a request for comment.
(Source: The Wall Street Journal, 07/10/13)
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