Charles Schwab Corp. reported a surge in assets and daily average trades for July, and analysts said even the company's strong monthly results would probably not dampen the consolidation trend in the discount brokerage industry that has been stimulated by industrywide overcapacity.
Rival Ameritrade Holding Corp., which gave a big boost to consolidation in June with its deal for the TD Waterhouse online brokerage business, reported much smaller July trading increases.
Michael Vinciquerra, an analyst at Raymond James & Associates in St. Petersburg, Fla., said he expects consolidation to continue, though there probably will not be any major deal for the next 12 to 18 months. Ameritrade and E-Trade Financial Corp., which announced a deal for the Harrisdirect online brokerage business last Monday, have been the buyers so far but need time to integrate the latest deals, he said.
"There are only four acquisition targets left that really matter," Mr. Vinciquerra said - Scottrade, which has 1.5 million accounts; Sharebuilder.com, with 700,000; Options Express, with 140,000 highly active option trading accounts; and JPMorgan Chase & Co.'s Brown & Co., with 250,000 accounts. "I am not sure that, long term, this unit fits with JP Morgan's brokerage model," he said.
David Trone, an analyst at Fox-Pitt, Kelton in New York, noted that Schwab's net new client assets grew but account openings remained sluggish.
"There's no evidence that the retail segment is growing for the execution-only business," he said. Schwab has seen greater growth in trades placed by investment advisers, he said.
Retail clients averaged 214,100 daily trades in July, a 7% increase from June and 42% more than the year earlier, Schwab reported. It said it does not comment on results from the first month of a quarter.
The results may encourage Schwab to focus on purchases that would let the company enhance its wealth management and adviser-related expertise, Mr. Trone said, particularly since these types of trades tend to generate higher commissions.
Joel Gomberg, an analyst at William Blair & Co. in Chicago, said Schwab's monthly results are unlikely to influence consolidation in the discount brokerage space.
Ameritrade, an Omaha discount brokerage company, said Friday that July's average daily trading volume was nearly flat from the month before. The July increase was 0.7%, to 144,000, and a 6.7% rise from the year earlier. It said it opened 23,000 accounts last month and closed 14,000, for a total of 3.7 million accounts. The company provided data but did not agree to interviews on the results.
Clients opened 38,500 accounts at Schwab during July, the company said, and it now has 7.2 million active accounts.
New and current clients brought in $6.3 billion of assets last month, Schwab said, up 85% from July 2004. Stock market gains also spurred the increase in client assets to $1.14 trillion at July 31, up 3% for the month and 17% from the year earlier.
Ameritrade said it had increased its client assets by 20.7%, to $82.2 billion, since the year earlier. Average client margin balances in July totaled about $3.5 billion, up 2.9% from June and 2.9% from the year before.
"Ameritrade continues to try to build scale in its trading segment and build assets on the investor side," Mr. Trone said, "and they'll be more than willing to do so through acquisitions if need be."
The analysts said consolidation would continue in the discount brokerage business as large players keep searching for scale.
"I think consolidation needs to happen because the commission rates have to come down," said Mr. Trone, who covers both Ameritrade and Schwab. "Activity rates will come and go with the market. Consolidation is being driven by commission pressure." And the discount brokers have been in a fee-cutting war this year as they try to boost trading volume.
Sixty to 70 brokerage firms with 5,000 to 100,000 accounts could be acquisition targets for the four companies he sees remaining as potential buyers, Mr. Vinciquerra said - Fidelity Investments, Schwab, E-Trade, and Ameritrade. But purchases of the smaller companies would not have a big impact, he said.
"I don't think that Fidelity and Schwab are necessarily actively looking at this point," Mr. Vinciquerra said.
"They are the largest players and are taking a bit of a different position than E-Trade and Ameritrade."
The latter two could really affect the discount brokerage industry by merging, he said.
"I think it is highly likely that Ameritrade and E-Trade will talk about coming together," he said. "I think it would create an online trading powerhouse that could really take advantage of the banking capabilities that E-Trade has put together. I think that would be the blockbuster that may happen in mid to late 2006."
