In the brokerage business, Charles Schwab (NYSE:SCHW) is much larger than TD Ameritrade (NYSE:AMTD). It serves as many as 8.8 million brokerage accounts, nearly 1.5x that of Ameritrade. Further, its pace of attracting new brokerage accounts is better as the number of brokerage accounts at Schwab grew at a CAGR of 4.4% between 2008 and 2012, compared to 3.8% for Ameritrade. Yet, Ameritrade’s trading commissions seem to generate much more value than that of Schwab. Our model estimates the value in Ameritrade’s trading commissions to be around $3.5 billion, versus just $2 billion for that of Schwab.
This may sound counter-intuitive at first, but a deeper dive into the companies’ business shows that Ameritrade actually generates much more in trading commissions than Schwab, although it has a much smaller customer base. Ameritrade generated around $1.07 billion in trading commissions from 5.8 million brokerage accounts in 2012. In contrast, Charles Schwab generated just $868 million from over 8.8 million accounts during the same period. Both the brokerages however charge similar rates for each trade, which implies that the contributing factor is a difference in trading behavior between customers on the two platforms.
Ameritrade’s Clients Trade More Often
According to our calculations, a typical Ameritrade client executes almost 15 trades in a year. In contrast, an average Charles Schwab client executes just 8 trades annually. We suspect that this wide difference in trading activity is due to Ameritrade’s Apex program for active traders. Among other things, this program offers free third-party research to qualifying clients and also waives off certain service charges for them. On the other hand, Schwab’s third party research seems be free only for a 30-day trial period.
Another reason for the higher number of trades at Ameritrade could be its focus on the derivatives market, which is gaining popularity rapidly. According to the firm’s management, derivatives comprised over 40% of its trading volume in 2012, up from about 10% in 2009 when they acquired Thinkorswim (the industry leader in retail options trades).  Although Charles Schwab doesn’t reveal the contribution of derivatives to its trading volumes, it is likely to be lower than Ameritrade’s given that they acquired OptionsXpress only in 2011.
Further, a recent online broker review by Barron’s suggests that Schwab lags Ameritrade in offering some products and features such as single stock futures, commodity futures, forex and portfolio margining. Writing covered calls, a strategy that is gaining in popularity among baby boomers, also seems to be cheaper at Ameritrade. 
(We welcome our readers who have used both services to tell us if there are any other reasons why they prefer one over the other. Please reach us at email@example.com)Notes: