NEW YORK ( TheStreet) -- Weak retail trading volumes have afflicted the online brokers since summer, and this morning's disappointing news from TradeStation Group ( TRAD) may be an early indicator that February's numbers could get particularly ugly. First, some background: TradeStation told Wall Street during the conference call for its fourth-quarter results on Feb. 11 that daily average revenue trades, or DARTs, were tracking at 93,000 for the month, a level that would have represented a sequential increase of around 11% from January DARTs of 83,800. A performance like that would have been good news for the company, which saw DARTs come in at a little more than 79,000 for the second half of 2009. The low month for the year was December, when DARTs ran at just 68,505. In January, things had perked up a bit as DARTs bumped up 83,802, although that performance still represented a considerable decline on a year-over-year basis from DARTs of 102,656 in January 2009. Because of the commentary on the conference call, hopes were high. Sandler O'Neill, in a note published Monday, forecast TradeStation as the one company in the group that would see a sequential increase in February, noting that increased volatility could be a boon for the company, whose customer base of high-frequency traders is typically more sensitive to such shifts. "In February, the average closing value of the VIX
an index that uses options activity in the S&P 500 to measure the market's volatility outlook was 22.5%, up 9.2% from January, breaking a streak of eleven consecutive months where volatility declined," the firm told clients, adding later that: "Higher volatility is typically positive for equity volumes and also trading activity in equity index futures." Sandler O'Neill was therefore optimistic about TradeStation, estimating its February DARTs at 88,000, up 5%, while, based on its channel checks, it was expecting retail trading activity overall to fall between 15% and 20% sequentially, with estimates for individual firms either down 15% ( TD Ameritrade ( AMTD), E*Trade ( ETFC) and Charles Schwab ( SCHW)) or else off 10% ( OptionsExpress' ( OXPS) retail business and Interactive Brokers Group ( IBKR)). But TradeStation wasn't able to deliver. While DARTs may have been strong through Feb. 11, the company said before the opening bell that the final tally for the month was 85,008, a figure that represents a much slighter sequential rise of 1.4%. The stock was relatively unmoved, down only 2 cents to $6.87, but that's likely because the shares were already the weakest performer in the group so far this year, down 12.7% based on Monday's close, compared with declines of 10.2% for Ameritrade, 6.3% for E*Trade, 3% for Schwab and 2.8% for Interactive Brokers. OptionsExpress was the outlier with shares up almost 3% in 2010 on the same basis.
FBR Capital Markets reiterated its market perform rating and $8 price target on the company following the news, saying the stock has "little in terms of a catalyst to the upside until short-term rates begin to move higher." The firm, which estimates DARTs at TradeStation are currently running at around 75,000, also trimmed its earning view for 2010 to 30 cents a share from 34 cents a share, bringing it down to the low end of management's prior outlook. The other brokers were all modestly lower in early afternoon action. While earnings expectations for this year no doubt factor in continued doldrums for retail trading, activity still needs to pick up at some point for these stocks to outperform. The price war kicked off by Schwab last month shows the companies themselves are aware they need to do more in order to entice casual traders to be more active. For the major players, Wall Street has set the bar pretty low in terms of earnings growth. E*Trade is fighting just to get back in the black with the current consensus view for a breakeven performance in the third quarter, and a penny per share profit in the fourth quarter of fiscal 2010. For the other big guns, Schwab and Ameritrade, analysts are looking for earnings growth of less than 6% for both companies in fiscal 2010. In other words, in-line results aren't likely to inspire buyers. From a stock perspective, E*Trade probably faces the most challenges. An active retail customer base remains its greatest strength as it continues to deal with problem loans and a question mark about long-term leadership with Robert Druskin at the helm on an interim basis. Today, the Wall Street Journal is reporting a leading outside candidate for the top job has decided to drop out of the running so the company could be going back to the drawing board. That setback would follow news out of long-rumored suitor Ameritrade's shareholder meeting last week when CEO Fred Tomczyk told the crowd an E*Trade deal would be "too much risk for us," according to a Dow Jones report. Without the prospect of a buyout, it's difficult to make a bullish case for the stock from here until the balance sheet is in better shape. And that task gets even harder if trading volumes continue to flag. -- Written by Michael Baron in New York.