Key Trends Impacting E-Trade
E-Trade (NASDAQ:ETFC) was recently fined $200,000 by the Dubai Financial Services Authority (DFSA) for failing to ensure the implementation of various anti-money-laundering controls. [1] This minor setback for the online brokerage firm should make it and its competitors, including Charles Schwab Corporation (NYSE:SCHW), Fidelity and Ameritrade (NYSE:AMTD), pull up their socks.
Below, we list a few key trends affecting the online brokerage industry, noting how they might affect E-Trade. We maintain a $16.88 price estimate for E-Trade stock, in line with market price.
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Increasing competition in the brokerage business to push trading commissions south
The online financial services market continues to evolve rapidly and we expect it to remain highly competitive. E-Trade’s trading and investing segment competes with full commission brokerage firms, discount brokerage firms, online brokerage firms, Internet banks, traditional “brick & mortar” retail banks and thrifts and market-making firms.
E-Trade has had to slash its commissions in the past to stay competitive in the market and acquire new client accounts. Because most of the revenue per trade is made up of commissions from equity trading, E-Trade’s average revenue per trade is expect to decline in the next few years before steadying in the long run, as we do not expect E-Trade to slash its commissions beyond a certain level.
Recovering markets invite investors to cash in on the bull run
Markets have been depressed in valuations for the last 2 years. However, as they are starting to recover from these lows, we anticipate a pickup in investments into the markets. This should result in an increase in the number of clients, and hence an increase in the number of active brokerage accounts.
Rise in equity trading volumes to increase principal transaction revenues
As equity markets recover from their depths of early 2009, we expect equity trading to increase. This will lead to increased number of stocks in which E-Trade acts as a market-maker and larger volumes of trading in these stocks. Both of these will boost principal transaction revenues over the years to come.
See our full analysis and $16.88 price estimate for E-Trade
Notes:- Dubai regulator fines E*trade $200,000, Reuters, May 1 2011 [↩]