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The online brokerage firm, E*TRADE Financial Corporation (ETFC - Analyst Report), reported a slump in Daily Average Revenue Trades (DARTs) in October. According to the monthly market activity report for October, E*TRADE’s DARTs were 124,246, declining 21% from October 2011 and 10% from September 2012.

Broker performance is generally measured through the DARTs that represent the number of trades from which brokers can expect commissions or fees. The fall in DARTs largely resulted from the uncertain economic recovery and investors’ reluctance to invest in the equity markets.

At the end of the month, E*TRADE’s total number of accounts came in at approximately 4.4 million, of which, about 2.9 million are brokerage accounts, 1.1 million are stock plan accounts and 0.4 million are banking accounts.

In October, total brokerage accounts of E*TRADE included gross new brokerage accounts of 23,365 and net new brokerage accounts of a negative 5,153. Moreover, in October, net new brokerage assets were $0.3 billion, contracting from $0.5 billion in the prior month. As a matter of fact, total brokerage accounts and net new brokerage accounts symbolize the company’s ability to attract and retain customers who trade and invest.

During the month, E*TRADE’s customer security holdings were $138.6 billion, down 1.8% from the prior month. Further, brokerage-related cash moved down 2.8% from last month to $31.7 billion, with customers being net buyers of about $1.3 billion in securities. Moreover, bank-related cash and deposits descended 1.4% from September and ended the month at $7.1 billion.

Peer Performance

Nearly in line with E*TRADE, in its monthly market activity report for October 2012, The Charles Schwab Corporation (SCHW - Analyst Report) reported almost flat DARTs compared with the prior month and waned 14% from the prior-year month to 439,700. This implies that the company witnessed insufficient trading activity. Further, the month was also impacted by weather-related market closures for two days.

Similarly, TD Ameritrade Holding Corporation (AMTD - Analyst Report) also reported a fall in DARTs both from the prior-year month and prior month. DARTs for October were 330,000, down 19% year over year and 7% from the prior month.

Our Viewpoint

Amid the challenging economy, sliding DARTs and new brokerage accounts remain a matter of concern. Lower trading activities, fluctuating interest rates and sluggish equity markets are expected to continuously impact the company’s financials in the near term.

Yet, E*TRADE’s initiatives to reduce balance sheet risk appear to be promising, although, it will put near-term pressure on the net interest margin. Moreover, its expense discipline and better capital position are impressive and are expected to aid the company in navigating through the current cycle.

E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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