NEW YORK (AP) - As retail brokerages begin to report first-quarter financial
results, their performance should be boosted by market volatility. But, analysts
widely agree that boost is likely short lived.
"We're probably at the final phases of volatility being a positive," said
Matt Snowling, an analyst with Friedman, Billings, Ramsey & Co.
Fees on customer trades are a large source of revenue and provide a wide
profit margin for retail brokerage firms. The more active traders are, the
better for the brokerage company's earnings.
"In the near term, it's a positive for online brokers," said Richard
Repetto, an analyst with Sandler O'Neill & Partners LP. Customers typically
complete more trades in a volatile market, Repetto added.
In fact, Charles Schwab Corp.'s earnings rose 12 percent to $305 million in
the latest first quarter that included wild market swings and increased
volatility.
There were multiple days during the period where the Standard & Poor's 500
index fell more than 2.5 percent and other days where it gained more than 3.5
percent.
Companies like Charles Schwab and TD Ameritrade Holding Corp. saw a surge in
average daily trading volume in January. Even February volume was better than
the year-ago period, although it slowed compared with January's performance.
Schwab's average daily trading volume jumped to 369,500 trades per day in
January before receding to 289,400 in February. Despite the month-over-month
decline, trading volume in February was still 5 percent better than a year
earlier.
TD Ameritrade clients averaged about 284,000 trades per day in February,
down from 346,000 in January, but better than the 264,000 averaged in February
2007.
The volume declines in February could be an indication brokerage firms are
entering a prolonged slump in trading volume, which in turn would slow earnings.
Analysts say volume could slow below year-ago levels in the coming months as
customers move toward more conservative investments if the market remains
volatile.
"Historically the short-term boost comes as customers tend to want to turn
over their portfolios to safer stocks," said Patrick O'Shaughnessy, an analyst
with Raymond James and Associates. Once that move is made, volume usually
declines as customers become more conservative, he added.
If consumer confidence continues to dip due to recession fears and continued
market volatility, O'Shaughnessy said trading volume declines will likely become
noticeable within three months.
Aside from moving to safer stocks that would be held for longer terms,
customers could also move into cash positions, Snowling said. Cash positions in
accounts provide narrower profit margins for brokerages than margins on trading
fees, further cutting into profits, he added.
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