Increased Options Trading to Lift Ameritrade? Not So Fast

by Trefis Team
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Ameritrade (NYSE:AMTD) is an online brokerage that allows individual investors to trade equities, options and other securities. Ameritrade also offers money market account services to clients through TD Bank USA. It competes with other online brokerages and financial services firms like E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).

Our price estimate for Ameritrade stands at $22.65, in line with market price.

Understanding Options Trading

Options are contracts that allow parties to buy or sell assets – generally shares – at a pre-determined price. The popularity of options comes from the concept that the buyer of an option does not have the obligation to complete the asset transaction. The buyer essentially holds a right to complete the trade if it is profitable.

Standardized options contracts are listed and traded at various futures and options exchanges around the world. With the number of retail investors exploring options trading along with normal equity trading on the rise, all online brokerage firms allow investors to undertake options trading. This works out to the advantage of the brokerage firms, as they normally charge higher commissions for executing options trades.

Ameritrade in the Game

Ameritrade, like its competitors, provides customers with a platform to trade in options contracts. In fact, option trades accounted for 21% of total trading volumes in the December quarter for 2009. [1] While the company charges $9.99 per equity trade, the commissions for options trading include an additional $0.75 per options contract on top of the $9.99 fee. [2] The structure does not actually put Ameritrade in position to gain much from investors’ increased interest in options trading.

However, Ameritrade’s options trading offerings are priced substantially higher than that of almost all its competitors. Competitors like OptionsHouse and TradeKing allow customers to trade in options while charging less than half the commissions and fees. [3] Their services, notably, are not as diversified as Ameritrade’s offerings.

But Competitive Pressures will Drive Trading Commissions Lower in the Near Future

Online brokerages have been waging a price war for quite some time, due to commoditization of their trading offerings. Although the giants in this industry like Ameritrade, Charles Schwab and E-Trade provide a larger range of trading options for investors, the significant price gap between the smaller online brokerages will likely force fees down south in the near future.

See our full analysis and $22.65 price estimate for Ameritrade

We estimated that Ameritrade’s average revenue per trade will decline from its current level of $12.6 to nearly $11 by the end of our forecast period. However, should Ameritrade slash its fees for options and other futures trading, which made up 30% of all trades in 2010, it could potentially reduce this average revenue per trade to just above $9 by the end of our forecast period. This represents a 6% downside to our $22.65 price estimate, dropping our number below $21.50.

  1. Ameritrade F1Q10 Earnings Transcript, SeekingAlpha, Jan 19 2010 []
  2. Ameritrade Pricing, Ameritrade, 2011 []
  3. OptionsHouse Rates, OptionsHouse, 2011 []
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