Brexit’s Impact On Brokerages: Positive And Negative

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AMTD
AMTD IDEA Group

As Britain voted to exit the European Union, markets tumbled the world over. In the U.S., S&P 500 and the NASDAQ fell by about 3.6% and 4%, respectively. In line with the broader market, brokerage stocks such as E-Trade, Schwab and TD Ameritrade also fell. Since the declaration of the results of the vote on Friday, the companies’ stock prices have fallen by approximately 15%. However, this is largely touted as an overreaction, and we have already seen the stocks start a gradual recovery process. Below we discuss the potential effects of Brexit on the abovementioned brokerages.

The Negative Effect

All three brokerages are highly dependent on interest-earning assets as a source of income. The net yield earned on these balances varies proportionately with the Fed’s repurchase rate. With the news of Brexit, and already weak economic data for May in the U.S., the probability of a rate hike by the Fed in the second half of the year has decreased significantly. As such, the drop in stock prices is largely attributable to the expectations of a delayed rate hike by the Fed, and the consequent loss in interest income. The graph below shows the movement of Ameritrade’s stock price following the vote on Friday, June 23rd.

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The Positive Effect

The second important source of income for the brokerages is trading commissions. The uncertainty around Britain’s vote led to heightened uncertainty in the markets, which still prevails. We expect this volatility to actually be lucrative for the brokerages, as it will likely result in increased trade volume and thus, higher trading revenues. A similar episode was seen last August (2015) when the fear of the Chinese economy’s slowdown turned the markets upside down. The brokerages came out of this spell with higher trading revenues. The graph below shows the spike in trade volumes at Ameritrade (in the month of August) in the aftermath of the Chinese slowdown. A similar reaction to the Brexit could actually benefit the brokerages.

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