Online Brokers Thrive on Volatility - TheStreet

Online Brokers Thrive on Volatility

Online brokerage firms E*Trade Financial, TD Ameritrade and Charles Schwab stand to profit from the increased volatility in the markets of late.
Publish date:



) -- Online brokerage firms

E*Trade Financial

(ETFC) - Get Report


TD Ameritrade

(AMTD) - Get Report


Charles Schwab

(SCHW) - Get Report

could profit from the increased volatility in the equities markets of late.

Trading volumes tend to dip as the weather warms, and the markets have been fairly staid so far this year compared to the uncertain conditions in the first quarter of 2009. But the combination of Greece's debt crisis and

new doubts

about the rest of Europe, along with ongoing fallout from the

Goldman Sachs

(GS) - Get Report

fraud scandal has caused volatility to spike higher in recent weeks.

E*Trade, TD Ameritrade and Charles Schwab are expected to release monthly figures related to total new client assets, and daily average revenue trades, or DARTs, over the next week or so, and investors should look for color on whether trading activity surged in the latter half of April because such a spike could set the tone for May and move the needle for second-quarter results.

Analysts on average currently expect E*Trade to post a loss of a penny per share for the June-ending quarter, according to

Thomson Reuters

. TD Ameritrade is expected to post earnings of 26 cents per share, while Schwab is expected to record earnings of 15 cents a share,

Thomson Reuters

says. The quarter still has roughly eight weeks to go.

According to Yahoo! Finance, the VIX, shorthand for the

Chicago Board Options Exchange Volatility Index


, a popular measure used to assess investor fear in the market, spiked more than 25% on April 27 to 22.81 --its highest level in nearlhy three months -- as the

Dow Jones Industrial Average

plunged more than 200 points to move back below the 11,000 threshold.

Investors became extremely skittish on that day after Standard & Poor's downgraded Greece's debt rating to junk status and also lowered Portugal's debt rating. It was also the day that members of Goldman Sachs' senior management team, including CEO Lloyd Blankfein, underwent hours of scrutiny by a Congressional panel about the role that the investment bank played in the housing crisis.

TD Ameritrade's chairman Joe Moglia said in an interview with


last week that on April 16, the day that the

Securities and Exchange Commission

filed civil fraud charges against Goldman Sachs, the retail brokerage firm had record daily trades from investors of 600,000 trades.

"That's never happened anywhere," he told



More recently, the VIX was climbing another 4.5% on Wednesday to 24.91.

Meanwhile, institutional investors grew slightly more pessimistic in April as the

State Street Investor Confidence Index

declined on a month-to-month basis. The index measures confidence by assessing the changes in institutional investors' equity holdings of risky assets by region.

The index fell 7.7 points in April to 99.7.

State Street

(STT) - Get Report

says that a reading of 100 in the index represents a "neutral level, where institutions are neither allocating towards nor away from risky assets." North American investors specifically registered on the index at 103.7 last month, State Street says.

"This month we saw institutional appetite for risk wane slightly, as volatility bounced back from the extremely benign levels seen in March," Ken Froot, a Harvard University professor and the index's co-developer, said in a statement.

"This was especially true toward the latter half of April," Froot said. "While institutions appear to have anticipated much of the improvement in economic prospects over the last six months, and allocated their portfolios accordingly, this month

April they displayed some increased caution about making further equity allocations. It remains to be seen whether this is a temporary pause, or an indication of a shift in the central theme of last year."

While the market forces of late have had a major impact on investor's confidence in the market, volatility in general has been on a downward trend since the end of last year.

E*Trade said during its recent conference call for first-quarter results that DARTs totaled 155,000 for the three-month period, down 2% on a quarterly sequential basis, and 11% lower when compared with the first quarter of 2009, reflecting the significant volatility of the year-earlier quarter.

TD Ameritrade said on April 20 that average client trades per day rose 17% from a year earlier, but remained relatively flat from the fourth quarter at 379,000.

TD Ameritrade cited the "impact of lower intraday volatility" and the "seasonal softening of client activity in the spring and summer month," along with continued low interest rates as reasons why it lowered its 2010 EPS outlook, according to a statement by CFO Bill Gerber in the earnings release.

--Written by Laurie Kulikowski in New York.