Ameritrade, Schwab See Surging Trades as Investors Ditch Funds

By Edgar Ortega

Nov. 14 (Bloomberg) -- Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Corp., the largest publicly traded U.S. online brokers, are handling more trades after mutual fund withdrawals reached a record one year into the bear market.

Charles Schwab, the biggest by client assets, may report today that average daily trading jumped 35 percent in October from a year earlier to 277,000 transactions, according to Sandler O’Neill & Partners LP. TD Ameritrade will top more than 400,000 trades, while E*Trade may increase 26 percent to over 238,000, according to Sandler O’Neill.

The three companies, whose customers have $1.72 trillion, are benefiting from investors’ increased interest in options and more savvy trading strategies after the Standard & Poor’s 500 Index fell to a five-year low, analysts said. That’s a turnaround from the bursting of the Internet bubble in 2000-2002, when daily bets on technology stocks dried up, competition eroded fees and shares of the online brokers plunged.

“What you see now is very savvy active traders, who use different strategies in a volatile market, and you also see investors with a long-term approach rather than chasing the latest fad,” Patrick O’Shaughnessy, an analyst with Raymond James Financial Inc. who covers the industry, said in an interview. “That will lead to more stable trading.”

Clients of the three firms haven’t pulled away from equities as they did between 2000 and 2002, even though the S&P 500 has tumbled 42 percent since peaking in October 2007.

Slump After 2000

Schwab handled 14 percent more trades in the third quarter than a year earlier, while second-ranked Fidelity Investments processed 19 percent. Activity at Ameritrade rose 6 percent, and transactions fell 1 percent at E*Trade. A year after the slump in technology stocks began in 2000, trading slowed 29 percent at Schwab, 11 percent at TD Ameritrade and 35 percent at E*Trade.

Since the S&P 500 peaked in 2007, San Francisco-based Schwab has fallen 22 percent on the Nasdaq Stock Market and TD Ameritrade, based in Omaha, Nebraska, has tumbled 36 percent. In the same amount of time following the end of the technology boom in 2000, they plunged 54 percent and 72 percent, respectively. New York-based E*Trade has lost 89 percent because of mounting losses on bad home-equity loans. That compares with the 71 percent slump through 2001.

Individual investors are still looking for bargains. In the week after the S&P 500 tumbled to its lowest close of the year on Oct. 27, stock mutual funds attracted $2.2 billion, according to estimates from Sausalito, California-based TrimTabs Investment Research. That was the first weekly inflow since July.

‘Not Come Back’

Mounting losses for U.S. stocks may ultimately scare away small investors, leading to less trading, said Bill Brodsky, chairman of the Chicago Board Options Exchange, the largest U.S. market for the derivatives. The S&P 500’s current 13-month retreat is more than twice as steep as the slump during the same period following the March 2000 peak.

“People are going to get out of the market, and they may not come back,” Brodsky said Nov. 12 at a conference in Chicago. “That’s my greatest concern.”

Online brokers will weather a slowdown better than in 2000 because they are less reliant on commissions, said James Ellman, who runs a hedge fund with more than $100 million in financial companies. Schwab and Ameritrade have created bank units that collect deposits.

“When people put money with their bank instead of a mutual fund, the margins for Schwab or Ameritrade actually go up significantly,” said Ellman, who owns TD Ameritrade shares. “They’ve built some offsets.”

Options Trading

Retail investors are also using more sophisticated strategies that involve the purchase or sale of options. TD Ameritrade estimates that the contracts will account for 14 percent of total trades over the next year, up from about 9 percent in 2007. That will help boost average commissions per trade by as much as 3.1 percent to $13.38 over the next year, compared with a 7.6 percent drop in 2001.

“All of our research studies continue to demonstrate that there is growth in the active-trader market of somewhere between 5 percent and 11 percent as we look out over the next three or four years,” Fred Tomczyk, TD Ameritrade’s chief executive officer, said at an investor conference Nov. 12 in New York.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.