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Charles Schwab


looks more like full-service nemesis

Merrill Lynch


every quarter, particularly now that both are big in the retail-heavy


stock trading business.

But for now, that may not be a good thing for investors, considering what a miserable quarter it was for trading stocks.

Granted, Merrill remains much larger on an overall assets and profits basis. Schwab, the San Francisco-based discount broker,

came out Tuesday with operating earnings of $144 million, while New York retail giant Merrill

brought in net income of $885 million. And Schwab has no investment banking, a major revenue line for Merrill.

But both brokerages reported Tuesday that principal transactions revenue -- or revenue from trading -- declined by about 25% from the quarter ended June 30 due to declines in equity trading. That came on the back of equally miserable quarters at competitors heavy into stock trading, from

National Discount Brokers



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Morgan Stanley Dean Witter



With retail investors on the sidelines during the summer months and much of September, the weak trading revenues were expected at Schwab and Merrill. But as the continuing weakness in the stock market this month continues to spook investors, concern is growing that the decline in trading may prove to be more than just seasonal. With Merrill, along with

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report


Deutsche Bank

, having recently decided to invest in U.S. trading companies, investors are looking to see if it's still an attractive enough business to create more acquisition targets. Topping the list is the one remaining publicly trade independent player:

Knight Trading Group


. Knight is due to report its earnings Wednesday morning.

Earlier this month,

Knight said that its earnings would come in lower than analysts had been expecting, primarily because the tough market environment made profiting from trading difficult for both amateurs and professionals this summer. But investors are waiting to see what CEO Kenneth Pasternak will say during a Wednesday morning conference call about this month.

During a call with analysts and investors Tuesday, Merrill's Chief Financial Officer Thomas Patrick didn't touch on whether the decline in the Nasdaq or in volume during the first part of October might have any lasting effects, while Schwab Chief Financial Officer Chris Dodds said during an interview that it's too early to tell. But Dodds added that the past few days have improved.

"Market volumes have picked up over the last few days, which one can generally assume we are getting the benefit of," Dodds said.

One thing that doesn't change overnight, however, is that Merrill's trading operation remains far larger than Schwab's, particularly since Merrill's acquisition of Nasdaq market maker

Herzog Heine & Geduld

closed Aug. 31. Schwab brought in $96.6 million in principal transaction revenue, down from $127.7 million in the June quarter, primarily from equities. Merrill on the other hand, brought in $1.16 billion, down from $1.55 billion in the previous quarter. (The previous quarter was restated to reflect the Herzog purchase.)

But Schwab is clearly doing a decent job of working to catch up with Merrill in some other areas. Schwab brought in $41 billion in net new client assets during the quarter, including $11 billion from one mutual fund client, bringing its total customer assets up to $961 billion. (That number was more than $1 trillion in mid-September but market losses in its customer accounts dragged it back down by the end of the quarter.) Merrill, meanwhile, brought in $34 billion in net new assets, driving up client assets to $1.77 trillion.

The war continues. Next battle -- investment banking?