Online Brokers correlate to Trading


    • Nothing the owners of these stocks don’t already know, but SNL Financial puts together a neat chart showing the correlation of Daily Average Revenue Trades (DARTs) alongside the stock prices of Schwab (SCHW -0.9%), E*Trade (ETFC -3%) and TD Ameritrade (AMTD -1.5%). Guess what? They correlate.
    • Somewhat tepid since the financial crisis, retail trading is making a comeback, but still has a ways to go until they return to pre-Lehman levels.
    • Citing lower yields on margin balances, KBW suggests re-engagement of active traders is behind the boosted activity rather than an influx of casual traders. Active traders tend to have higher account balances and pay lower rates.
    • One sign of optimism in the sector – boosted spending on advertising. E*Trade can now get a higher marginal return on investment and marketing dollars, said CEO Paul Idzik on the earnings call last week (transcript). At TD Ameritrade, advertising spending rose 21% Y/Y. CEO Fredric Tomczyk: “We think … now [is] the time to tap the gas pedal a little harder on advertising.”

    Monday, January 27, 2014 2:39 PM ET 
    Strong equity markets, tapering certainty lift online brokers

    By Rodger Nayak and Vipra Vora

    The surge in the equity markets and improving economy have provided a jolt to online brokers, which are benefiting from a rush of trading activity that has continued into the new year.

    SNL data show that for many of the online brokers, trading activity is reaching levels not seen in two years. This higher level of activity is carrying through to the companies’ earnings. Charles Schwab Corp.E*TRADE Financial Corp. and TD Ameritrade Holding Corp. all beat analyst estimates for the final quarter of 2013.

    E*TRADE executives said on a recent earnings call that activity levels had risen 20% in early January compared to December 2013, while TD Ameritrade executives called early January the best start to a year in its history, according to call transcripts.

    Recognizing that clients seem keener on investing in the markets, companies are pressing their edge with millions of dollars in new advertising.

    “With less uncertainty in Washington and [the] improving macroeconomic environment and the beginning of Fed tapering, retail investors are making their way back to the market, leaving us with plenty to feel good about,” TD Ameritrade President and CEO Fredric Tomczyk said on a Jan. 21 call to discuss the company’s fiscal first-quarter earnings, according to a transcript.


    Retail trading activity has been largely tepid since the financial crisis. Clients of the online brokers have not traded stocks as frequently, which analysts attribute to low economic confidence and Washington brinksmanship.

    Companies began to strike a more optimistic tone early in 2012, when retail trading showed signs of life. The stocks rallied in 2013, spurred not only by better trading but also by higher interest rates, which have eased pressure on earnings.

    “I think the investor confidence has now returned as some of the political risk has subsided,” Compass Point analyst Michael Tarkan told SNL. “I don’t necessarily know what that means for 2014 trading levels, but it’s a good sign for the online brokers.”  

    In a Jan. 17 report on Charles Schwab’s earnings, Sanford C. Bernstein analyst Brad Hintz pointed to a 5% quarter-over-quarter increase in margin loans in the fourth quarter of 2013 as a sign of retail re-engagement. Furthermore, trading activity increased 8% from November 2013 to December, a typically slow month for the sector, further indicating that investors are re-engaging with the platforms.

    “Retail investors take on more margin debt when they are optimistic about the equity markets, and so we view this loan growth as evidence of the growing momentum of the retail rebound,” Hintz said.

    Online brokers reported higher daily average revenue trades in the quarter ended Dec. 31, 2013, sequentially and year over year. At E*TRADE and TD Ameritrade, their DARTs were the highest since the debate surrounding the debt ceiling in the third quarter of 2011, when activity levels spiked temporarily. Analysts attributed the higher activity levels at the end of 2013 and the start of 2014 to the performance of the equity markets in 2013 and the start of the Fed’s tapering. The S&P 500 rose about 30% in 2013.

    “When the market is going up, people will check their account balances a lot more often than when the market is going down, and I think that’s part of it,” Tarkan said. When clients monitor their accounts more often, they are more likely to trade and adjust their positions, boosting activity at the brokers, he said.

    Keefe Bruyette & Woods analyst Joel Jeffrey said the higher activity has significantly benefited the online brokers’ bottom lines but said that it is not yet clear that retail traders’ activity levels are higher.

    “It sounds like there is a slight improvement [among retail traders], but I think what we’ve seen to date from the trading numbers is there’s been more activity coming particularly from the more active traders,” Jeffrey told SNL.


    Jeffrey pointed to the lower yields on margin balances as a sign that the higher activity levels are occurring due to re-engagement among more active traders rather than investors who trade more casually. More active traders tend to have higher account balances and therefore pay lower rates on margin loans, he said.

    Average client margin balances at TD Ameritrade rose to $9.3 billion in its fiscal first quarter of 2014 ended Dec. 31, 2013, from $8.5 billion in the previous quarter, but the average annualized yield fell to 3.92% from 3.95%. At E*TRADE, margin receivables averaged $6.4 billion in the fourth quarter, up 8% sequentially, while the average yield slid to 3.67% from 3.75%. SNL data show accounts due from customers at Charles Schwab, E*TRADE and TD Ameritrade rose steadily in 2013.

    “As confidence builds in the equity markets, you’ll see more retail activity,” Jeffrey said. “They’ll tend to lag the markets a bit in terms of their activity, but typically the more active investors will be in there sooner than your retail investor.”

    Active traders have indicated more confidence in the environment, said Salomon Sredni, president and CEO of TradeStation Group Inc., which is geared mostly toward professional clients. Sredni said the Federal Reserve’s December 2013 decision to taper quantitative easing is a significant factor in bringing activity levels higher, but confidence in other areas has also improved.

    “So much of what people do or don’t do is really directly related to how they feel about the market and how they feel about the economy,” Sredni told SNL. “[Higher confidence] definitely had a positive impact, and I see that here.”

    A sign of optimism among online brokers in the environment could be seen in their spending on advertising, executives said. With the Winter Olympics approaching, companies view the event as a chance to gain exposure at a time when consumers feel better about investing the markets. E*TRADE CEO Paul Idzik said on its Jan. 23 earnings call that E*TRADE can now reach a higher marginal return on investment and marketing dollars.

    Advertising spending in its fiscal first quarter rose 21% year over year at TD Ameritrade, according to Hintz, and TD Ameritrade’s Tomczyk said the company believes it can grow its activity levels by boosting its brand.

    “We think … now [is] the time to tap the gas pedal a little harder on advertising,” Tomczyk said.


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