BMO analysts David J Chiaverini and Richard Fellinger examine the current trends prevailing in the diversified financials industry in their report of October 31, 2013.

October trends good for discount brokers

The BMO analysts have ascertained that daily average revenue trends (DARTs) at discount brokers were running higher in October by about 7% on a sequential quarter basis and +28% on a year-on-year basis. Historical seasonal patterns, as well as the normally higher volumes due to earnings reporting, corroborate this trend.

1-darts-trend Discount brokers

Market volumes computed through 10/29 show that daily cash equity volume was up 2% both on monthly as well as year-on-year basis. However, daily options trading volumes were up strongly at 11% monthly and 13% year-on-year.

2-dollar-volume Discount brokers

Market analysis

The S&P 500 (INDEXSP:.INX) was up nearly 5%, while mutual fund inflows were encouraging and show that long term equity inflows were +$13B for the month (up to October 23). Bond funds continued to bleed. Interestingly the index of market volatility, VIX, declined once the dust settled from the government shutdown and debt ceiling issues. VOLATILITY S&P 500 (INDEXCBOE:VIX) was 13.7 as on October 30, versus an average 14.8 over the last 12 months.

3-mf-flows Discound brokers

All the above factors make a case for 7% growth (q-on-q) and 20% growth (year-on-year) in DARTs during CY4Q13.

Interest rates

Interest rates declined following the Fed ‘non-taper,’ but henceforth interest margins at brokers may show an improving trend, according to the authors.

Recommendations

4-recommendations discount brokers 

Charles Schwab Corp (NYSE:SCHW) is rated Outperform because it is the biggest player in the discount broking space, and has the ability to boost earnings in a rising interest rate regime. In fact, the market has probably not factored in the impact of the nearly 200bps rate increase in recent months on Charles Schwab earnings. However, the analysts have trimmed their PT from $26 to $25.

TD Ameritrade Holding Corp. (NYSE:AMTD) is rated at Market Perform. The authors are appreciative of double digit growth in asset gathering, the company’s business model and its robust growth rate over the recent years.

Shares of E TRADE Financial Corporation (NASDAQ:ETFC) are rated at Market Perform because of valuation constraints, though it has a good retail business and brand equity.