Monthly Brokerage Notes: Ameritrade Starts The Year With Strong Trade Volumes

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TD Ameritrade (NASDAQ:AMTD) started 2016 on a high note, reporting volume growth of 14% year-on-year (y-o-y) to 565,000 trades per day in January. This is in contrast to the trend seen in the last three months of 2015, when the number of trades executed per day on Ameritrade’s platform fell, resulting in a 9% drop in transaction-based revenues to $328 million. [1] In terms of client balances, while average spread-based balances saw sustained growth, fee-based assets stagnated in January.

In another key development, the brokerage decided to acquire research and consulting firm FA Insight, in an effort to provide big data capabilities to its registered investment advisers (RIAs).

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We have a $34 price estimate for Ameritrade’s stock, which is significantly above the current market price.

See our full analysis for TD Ameritrade

Surge In Trade Volumes

TD Ameritrade’s surge in January trade volumes to 565,000 trades per day is in contrast to the start of its fiscal 2016 (beginning in October) when volumes deteriorated to 438,000 trades per day. [2] The most likely reason behind higher volumes was the volatility seen in the global economy at the beginning of 2016, due to uncertainty around oil prices, a slowdown in China and other emerging economies, and dim GDP growth in the U.S.

The total number of funded accounts at the brokerage stood at just over 6.68 million at the end of December 2015, 5% higher than the year-ago period. If volumes are sustained at January levels, we can expect an impressive 21 annualized trades per funded account. However, we have a conservative forecast for Ameritrade’s annualized trades per account at 18 trades per funded account for the calendar year 2016, as the surge in trade volumes is unlikely to last for the full year. ((TD Ameritrade Monthly Metrics, Ameritrade Press Release, February 2016))

Investment Product Fees Stagnate

Investment product fees, or the fees charged for its services on money market mutual funds and other funds, have been a fast-growing revenue stream for Ameritrade. At the end of fiscal 2015, fee based balances stood at $156.1 billion, which translated to an impressive 12% y-o-y growth. [2] However, fee based assets stagnated in January at $152.2 billion on an annual basis, which was down 4% on a sequential basis. This was likely a result of global economic turmoil. We expect these assets to grow to $169 billion in 2016, and then at a CAGR of approximately 7% in the future.

In 2015, TD Ameritrade introduced a new division called Business Performance Solutions, which enables firms to improve their corporate performance by optimizing business processes and achieving pre-set goals. The acquisition of FA Insight is the latest step taken by the brokerage in this direction. [3] FA Insight offers detailed recommendations based on organizations’ specific needs and requirements, such as compensation structuring, operational efficiency and organizational design. With the acquisition, Ameritrade will be able to provide FA Insight’s Big Data capabilities to its RIAs, thus helping its clients optimize performance. The company expects the transaction to close in the June quarter.

Spread-Based Assets Witness Sustained Growth

Spread-based assets, which consist of interest-earning assets and insured deposit account (IDA) balances, grew 12% year-on-year to $105.2 billion in January. The growth was driven by both IDA balances and interest earning assets, which were up 10% y-o-y to $83.6 billion and 15% y-o-y to $21.6 billion, respectively. Going forward, the company expects the interest rate hike to boost spread-based revenues by $50 million to $80 million in 2016. ((TD Ameritrade Q1 FY 2016 Earnings Call Transcript, Seeking Alpha, January 2016))

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Notes:
  1. TD Ameritrade Q1 FY 2016 Earnings Call Transcript, Seeking Alpha, January 2016 []
  2. TD Ameritrade Monthly Metrics, Ameritrade Press Release, February 2016 [] []
  3. TD Ameritrade Agrees To Acquire FA Insight, Ameritrade Press Release, February 2016 []