The landscape in the retail brokerage industry has certainly changed. Once the exclusive territory of full-service brokers and big investment banks who charged up to 5% of the value of a trade to execute the purchase and sale of stocks, the industry is now dominated by what used to be known as “discount brokers” who operate primarily online and offer fast executions and previously unheard of prices – in some cases as low as a few dollars per trade.
While some investors still choose the attention of a traditional broker, most active and self-directed investors now use a discount broker to buy and sell not only stocks, but also options, futures and even currencies
The Original Discount Broker
Charles Schwab (SCHW - Free Report) was the pioneer of the discount brokerage industry. The first major house to offer lighter services for reduced commissions and fees, they’ve been synonymous with the discount brokerage industry since the beginning.
Offering a wide range of investment services including both ordinary discount brokerage and more hands-on advice through a network of independent advisors, Schwab was the beneficiary of increased trading volumes during the volatile first quarter of 2018 and reported record revenues with sales of $2.4B, up 15% from the same quarter in 2017.
Brokers also typically benefit from higher interest rates as it increases the amount they collect on margin balances and Schwab saw net interest margins increase to 2.2% from 1.87 a year earlier.
Despite higher costs for employee compensation and a one-time charge due to a $15M loss in unsecured losses by customers in volatility products, Schwab earned $783M in the quarter, or $0.55/share, a 41% increase over last year.
With 6 analyst upgrades in the past 30 days, Charles Schwab is a Zacks Rank #3 (Hold), but has a strong possibility of changing soon.
The Online Pioneer
E-trade Financial Corporation (ETFC - Free Report) was one the first discount brokers to concentrate on an online presence - in the mid-1990s - and has been a favorite of actively trading customers ever since.
Just like competitor Charles Schwab, they were a big beneficiary of the market volatility early in the year, posting results last Thursday that set all-time records for revenues, operating margins, trading revenue, margin balances and net asset flows.
Beating the Zacks Consensus Estimate, E-Trade reported earnings of $0.88/share and the positive language in the report has prompted 5 analysts to raise their forecasts for 2018, resulting in a Zacks Consensus Estimate of $3.53/Share, up from $3.11 90 days ago.
Etrade is a Zacks rank #1 (Strong Buy).
Former Market Maker Turned Broker
Growing from options market making giant Timber Hill, Interactive Brokers (IBKR - Free Report) has found that using its platform for market access as a broker is considerably more profitable in terms of both revenues and net earnings.
Interactive brokers caters to sophisticated individual investors and advisors, offering tools and services to what professional traders use, but at discount prices. They offer trading in multiple asset classes worldwide in a single account and from a single interface.
After selling the underperforming Timber Hill market-making division in 2017, Interactive brokers has registered double digit earnings surprises in each of the last three quarters and seen the Zacks Consensus Estimate rise to $2.21/share for 2018, a 44% increase from the $1.53 reported in 2017, earning a Zacks Rank #1 (Strong Buy).
The stock price has been rewarded in kind, rising from the mid-30s in the summer of 2017 to close at $73.80 on Friday, giving it a Momentum score of “A”.
Though the volatility that aided the results of the discount brokers last quarter seems to have subsided somewhat in recent weeks, the prospect of trade wars, geopolitical risk and the coming mid-term elections all increase the probability that we’ll see more volatile markets throughout 2018.
Investors would be well-served to include some companies like brokerage houses that benefit from choppy markets.