“We believe daily average revenue trades (DARTs) at the discount brokers declined 2% to 4% m/m in November (+18% y/y) given our channel checks with private brokers,” say BMO Capital Markets analysts David J Chiaverini and Richard Fellinger in their recent study of discount brokers.

DARTs Discount Brokers

This is a period when brokers usually see a seasonal 3% m/m uptick in DARTs, so what caused the fall?

Low volatility pressured trading volumes

The culprit was exceptionally low volatility prevailing through November. In fact the VIX never managed to surpass 14 during the month as also the monthly average of the lowest mark since February 2007.

2-vix DARTs Discount Brokers

US cash equity volume was 6.1B shares per day, down 4% m/m, while daily options contracts traded were 16.1M, down 8% m/m.

3-cash-eq-vol DARTs Discount Brokers

4-option-vol Discount Brokers

Volumes therefore fell in November even though the S&P 500 (INDEXSP:.INX) and Russell 2000 increased 3% and 4%, respectively, while fund flows continued to move into equity (+$22 billion MTD through 11/20). Bond fund redemptions (-$15 billion) continued for the sixth straight month.

Though interest rates ruled lower, BMO expect that Net Interest Margins at the brokers may rule steady in forthcoming quarters.

“For the full quarter, we are modeling CY4Q13 DARTs at the brokers on average to be up 7% q/q and up 20% y/y,” say the analysts at BMO.

Price targets on discount brokers

BMO is raising price targets based on valuations that now include projections for 2015.

5-pt Discount Brokers Darts


Charles Schwab Corp (NYSE:SCHW) – Outperform, based on industry leadership, high recurring revenue and beneficial exposure to rising interest rates.

TD Ameritrade Holding Corp. (NYSE:AMTD) – Market Perform, based on solid and consistent asset growth rates, and low balance sheet risk.

E TRADE Financial Corporation (NASDAQ:ETFC) – Market Perform, based on credit improvement appropriately reflected in valuation.

BMO maintain a rating of Market Perform on the Diversified Financials Industry.