Updated from 11:47 a.m.

The online brokers are back in business.

TD Ameritrade ( AMTD - Get Report) and rival E*Trade Financial ( ETFC - Get Report) soared Wednesday after activist investors took a big stake in Ameritrade and pushed the company to sell itself.

The Omaha, Neb., company said in a regulatory filing late Tuesday that hedge funds Jana Partners and S.A.C. Capital took an 8.4% stake in the firm. The funds said they "wish to see TD Ameritrade pursue a business combination with one of its industry peers," namely E*Trade or Charles Schwab ( SCHW - Get Report).

The move set off a rally in brokers TD Ameritrade, which rose 94 cents to $20.89, and E*Trade, which rose $1.54 to $25.41. Online asset manager Schwab, which said it isn't interested in a deal, saw its stock fall 27 cents to $21.78.

Ameritrade said in the filing that it is focused on its organic growth strategy but regularly reviews its strategy and would consider a deal "at the right time and if it can reach agreement for the right strategic fit." The company said it has had and expects to continue to have talks. An E*Trade spokeswoman says the firm does not comment on market speculation.

Observers have long speculated that the major online firms would link up as consolidation continues in the brokerage sector. Just last week, Wachovia ( WB - Get Report) agreed to pay $6.8 billion for regional broker A.G. Edwards ( AGE).

"This is a group that we thought probably would consolidate at some point, and that's why we have exposure to it," says Tim Ghriskey, co-founder of Solaris Group and head of Solaris Asset Management. Solaris owns positions in E*Trade.

Speculation that TD Ameritrade is a buyout target heated up last month as hedge funds including S.A.C. bought positions in the stock.

"With activist shareholders trying to break the TD Bank grip on the company, we believe the shareholders will begin assigning some value to the potential synergies created in a merger with an industry peer," writes Matt Snowling, an analyst at Friedman Billings Ramsey. "While it is still far from clear if either E*Trade or Schwab would be willing to make a bid, we believe the letter could serve as a catalyst to TD Bank to either make a bid for Ameritrade or step aside if an outside offer was presented."

Snowling raised his 12-month price target to $23 from $19. He has an outperform rating on the stock.

Needless to say, if TD Ameritrade were to combine with another broker, the added revenue as well as cost savings from such a combination could be significant.

S.A.C. and Jana see so-called synergies in a merger with Schwab of between $800 and $1 billion, while one with E*Trade could result in cost savings around $400 to $500 million and additional revenue in the range of $100 million on an annual basis.

But some market participants say TD Ameritrade does not have to do a deal right now.

"There are a lot of ways this could go," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services fund. "Does Ameritrade have a lot of downside here? No. Something will be done for it to enhance value, but it may take some time."

Schutz does not own shares of the online brokers.

TD Ameritrade has acknowledged that it needs to expand beyond mere trading. It has turned its attention toward attracting "mass affluent" investors -- those with $100,000 to $1 million of investable assets.

Last year, the company merged with TD Bank's U.S. retail brokerage, TD Waterhouse USA. In May, the company finally completed the conversion of former TD Waterhouse clients.

The two hedge funds say they are not convinced that the new firm will be successful.

TD Ameritrade's "modest track record of organic growth in qualified accounts and assets, narrow product set and unproven ability to offer investment advice gives little indication that it will be successful in doing so," the hedge funds say.

"A strategic combination with Schwab, which dominates this market, would solve this problem immediately," they say. "Likewise, combining with E*Trade would provide greater customer lifetime value," given the younger average age of E*Trade's customers, the ability to enter international markets and cross-selling services through E*Trade's bank operations.

(To watch Laurie Kulikowski's video take of this column, click here).