Discount brokers saw their daily average trade (DART) volume increase slightly in September, though they are still down for the quarter. September is normally a strong month, but uncertainty and an ‘unusually active August’ depressed trade volumes somewhat, say David J. Chiaverini and Richard Fellinger.

Discount Brokers

Discount broker uncertainty in market

Based on their channel contacts, the analysts estimate just 2 percent growth in DARTs. “The modest month-over-month increase contrasts with the normal seasonal increase of 9 percent (median over the last 10 years),” they write. “We attribute the tepid trading activity to tougher comps from an unusually active August and investors choosing to sit on the sidelines given the amount of uncertainty in the markets.” They now predict that discount brokerages will be up 13 percent for the year and down 4 percent for the quarter. This puts the sector up 10 percent year on year, but with the looming political showdown and the possibility of a government shutdown, trade volumes could be depressed in the beginning of October as well.

“We are also modestly increasing our quarterly estimates ahead of earnings for our covered companies,” they write.

Discount brokers: Charles Schwab ratings

The two analysts rate Charles Schwab Corp (NYSE:SCHW) as outperform because of its “leadership position in the discount brokerage space, high level of recurring revenues, and significant earnings leverage to rising interest rates.” Schwab also has revenue streams that most of its competitors don’t, including 401(k) cross-selling, asset-based revenues, and an index-based 401(k) product that they think will lead to stronger growth.

Discount brokers: TD Ameritrade ratings

Chiaverini and Fellinger also like TD Ameritrade Holding Corp. (NYSE:AMTD), even though they rate it as Market Perform, citing strong fundamentals and a beneficial relationship with TD Bank. Ameritrade is also branching out into advice-based products (most discount brokerages keep fees low by offering no investment advice) which could appeal to a new segment of cost-conscious investor. E*Trade Financial, which they also rate as market perform, is in a weaker position because it came late to building asset-based revenue streams. E*Trade has a good brand and stable business model, so it may be a safe long-term stock, but it doesn’t look like it will beat the market in the near term.