Yahoo  Aug 27  Comment 
E*TRADE (ETFC) needs investors to pay close attention to the stock based on moves in the options market lately.
Clusterstock  Aug 21  Comment 
JPMorgan announced Tuesday a digital-investing service that has free trades and no account minimum. Online brokers' stocks are getting hit hard on the news. JPMorgan shares are ticking higher. Online brokers are under pressure Tuesday...
MarketWatch  Aug 21  Comment 
Ameritrade, Schwab, E-Trade down 4%-5% on J.P. Morgan free-trades news
Clusterstock  Aug 16  Comment 
Many investors in the parent company of MoviePass, Helios and Matheson Analytics, have seen their stakes dwindle over 99% in recent months, with some losing over $100,000. To fund massive MoviePass losses, Helios has flooded the market with new...


E*Trade (NYSE: ETFC) is a leading online brokerage firm, which also offers retail banking services, such as checking and savings accounts and CD accounts. [1] E*Trade makes money by charging commission fees to its customers for transactions made. These fees are variable and are based on the size of the client, the size of the trades, and the frequency of the trades. For the full year 2010, E*Trade reported a total revenue of $2.4B and a net loss of $1.3B.

The online brokerage firms have been facing increased competition and downward price pressure as traditional retail banks, such as Bank of America (BAC) and Wells Fargo (WFC), have entered the industry. This pressure prompted E*Trade to find another retail outlet: retail banking.[2].

Corporate Overview

E*Trade provides online brokerage products and investor-focused banking products, sweep deposits and savings products to individual retail investors. The company’s subsidiaries include E*Trade Bank, which is a federally chartered savings bank that provides investor-focused banking products to retail customers nationwide and deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC), E*Trade Capital Markets, LLC, which is a registered broker-dealer and market-maker, E*Trade Clearing LLC, which is the clearing firm for the brokerage subsidiaries and is a wholly owned operating subsidiary of E*Trade Bank, and E*Trade Securities LLC, which is a registered broker dealer.

Business Segments

E*Trade Financial Corporation provides online brokerage and retail related products directly and through its numerous subsidiaries, many of which are overseen by governmental and self-regulatory organizations. Its most significant subsidiaries are as follows:

  • E*Trade Bank - a federally chartered savings bank that provides investor-focused banking products to retail customers and deposit accounts insured by the FDIC.
  • E*Trade Capital Markets, LLC - a registered broker-dealer and market-maker
  • E*Trade Clearing, LLC - a clearing firm for the company's brokerage subsidiaries. It's main purpose is to transfer securities form one party to another.
  • E*Trade Securities, LLC - a registered broker-dealer and primary provider of brokerage services to the company's customers.

E*Trade's core business is its trading and investing franchise, which focuses on two primary groups of customers: active traders and long-term investors. The franchise offers two branches of products and services:

Trading and Investing

The Trading and Investing segment is E*Trade's main service sector. It provides an online investing and trading platform that allows clients to trade market and limit equity, options, futures, exchange-traded funds, and bond orders. Its retail banking arm which includes checking, savings, sweep, and money market accounts, along with certificates of deposit (CDs), as well as mortgage, home equity, margin, and credit card products.

Balance Sheet Management

The Balance Sheet Management segment generates additional net operating interest income by leveraging loans (previously originated or purchased from third parties) and customer cash.[3] Net interest income is generated by taking customers' deposits and loans, and reinvesting them where they hope to earn a high return. Although this can be a risky practice, it can keep the difference, also known as the spread) between the two interest rates. The more money E*Trade has in its clients’ accounts, the more its can earn on the interest rate spread.


E*Trade's clients include both individuals and corporations which account for approximately 2.7 million active brokerage accounts, 1.0 million stock plan accounts and 0.8 million active banking accounts.[3] E*Trade earns revenue by charging commission fees on its clients' trades. The amount of the commission varies from client to client, depending on the size of a client’s account and how often she execute trades. Rising competition has driven down commission fees in the industry, leading E*Trade to focus on mass affluent investors, asset accumulation, and interest income.

  • Mass Affluent investors are investors who execute fewer than 30 trades per quarter and hold over $50,000 in assets in combined retail accounts. This group is particularly sought after because of the high cash accumulation of each investor.
  • Main Street investors are investors who execute fewer than 30 trades per quarter and hold less than $50,000 in assets in combined retail accounts. These investors pay a higher commission for stock trades than the Mass Affluent group.
  • Active Traders are clients who execute more than 30 trades per quarter. These clients pay lower commissions on their trades, regardless of their total assets.
  • Corporate Clients: E*Trade manages the employee stock plans for over 2,500 firms in more than 100 countries, which cumulatively cover over 1.3 million employees. While the corporate services sector is not E*Trade's main focus, it is a significant source of revenue and provides nearly 33% of total profit.

Key Operating Metrics

  • Daily Average Revenue Trades: DARTs are the average number of trades clients make in a day. Each of these trades provides revenue for the broker-dealer through their commissions.
  • Net Interest Spread: The net difference between the interest rate the broker-dealer makes on its investments and the interest rate it pays its clients. The larger the net interest spread is, the more money the broker-dealer makes on its clients assets.
  • Total Client Assets: The total amount of money that the broker-dealer is holding for its clients. The higher their total client assets the more they can exploit the net interest spread and create revenue. This makes building up client assets a main focus for broker-dealers.

Trends and Forces

Differentiation through product and service enhancements

E*Trade has faced increased competition for its online brokerage, which has effectively dropped trading prices and commissions. To grow revenues, E*Trade expanded into the retail banking industry business in an attempt to attract new customers and offer its existing customers a broader range of products and services. To further differentiate itself, it has introduced enhancements to its product and service offerings. For example, it has increased its customer services by launching 24/7 phone and online chat services for potential customers, as well as current customers who may have investment related questions. It has introduced personal finance planning tools to aid its customers with retirement, tax, and trading activities.[4] In addition, it has even extended its trading capabilities to Blackberries and iPhones. MobilePro, its free trading app, was the most downloaded finance app for iPhones and had more than 2 million Blackberry log-ins in less than one year.[5] E*Trade is considered to have the leading mobile platform among its online brokerage competitors TD Ameritrade Holding (AMTD) and Fidelity Brokerage Services. E*Trade has also partnered with PNC Financial Services (PNC) to add a line-up of actively managed portfolios to their line of products.[6]

Market Swings & Fed Interest Rates

Revenues based on commissions are susceptible to swings in the stock market, which are linked to general economic conditions. In a bearish market, the trading volume is relatively low and this in turn decreases revenue from commissions. On the flip side, an upturn in the market will increase trading volumes and hence commission revenue for E*Trade. In periods of economic uncertainty, trading volumes can spike significantly, reflecting investors' apprehension about the future of the economy.

Furthermore, the Fed's interest rates directly affect broker-dealer's net interest revenues. A decrease in interest rates could hurt E*Trade's net interest margins and put pressure on revenues. E*Trade is particularly leveraged to interest rates since interest income makes up a larger percentage of its total revenues than any of its main competitors.


E*Trade Financial faces strong competition, most importantly from Charles Schwab (SCHW),TD Ameritrade (AMTD), Fidelity, and Scottrade. E*Trade and TD Ameritrade are very similar in structure: they both run a no-frills investing platform geared towards self-guided investors. Asset accumulation can be difficult for E*Trade and other no-frills online brokers as they're competing against firms that offer more advanced guidance for investors. As a result, E*Trade is far behind their "high-touch" counterparts when it comes to wallet share because they don't offer investment advising products and services. Charles Schwab--which has more comprehensive offerings--has been more successful in attaining a greater share of its clients' total assets.

By stepping up its retail banking offerings, E*Trade has decreased its dependence on commissions, but it has become increasingly reliant on interest income as a principal source of revenue. Changes in interest rates can, therefore, have a significant impact on earnings. This is especially true for E*Trade, which derives a larger percentage of its revenue from interest income than its main competitors, Charles Schwab (SCHW) and TD Ameritrade (AMTD).

  • Market Share Comparisons: Market share can be measured in a few different ways: accounts held; total assets; or number of trades made. E*Trade's customers fund their accounts with about half the funds on average compared to the overall market and implies a relatively smaller wallet-share. Schwab, on the other hand, holds twice the market share in assets that it does in accounts on average.
  • New Accounts Acquired: An important metric for comparing competitors is new client acquisition rates. Price wars among the online broker-dealers have driven down commission fees in an effort to attract new clients. Changes in new account acquisition are often driven by marketing and advertising spend as well as efforts to cross-sell products to their existing customer base.
  • Revenue Composition Comparison: The sources of revenue are different between the competing online broker-dealers. In particular, Charles Schwab is quite different because its main source of revenue is from asset management fees, a source of revenue that E*Trade and TD Ameritrade do not have. By increasing its dependence on interest-based revenue streams, however, E*Trade has increased its exposure to market fluctuations; its investments are linked to market conditions and can be volatile. Schwab and TD Ameritrade are relatively less exposed to this risk.
  • Commissions on Trades: The fees that clients pay to make trades can be a significant factor when choosing a broker-dealer. Brokerages have been competing vigorously to offer lower trading fees, often giving a number of free trades to new clients or to customers who refer new clients.

Wells Fargo (WFC) and Bank of America (BAC), who are new in the brokerage industry, have offered fee-free online trading to a number of their customers. Offers like this will apply great pressure on the well established broker-dealers to cut their fees even further. To make up for lost commission revenues it will be necessary to increase revenues in other areas such as net-interest revenue. If the current trend continues it is likely that trading fees will continue to fall in the years to come.


  1. Business Wire, "E*TRADE FINANCIAL Corporation Announces Fourth Quarter and Full-Year 2009 Results"
  2. Google Finance: ETFC
  3. 3.0 3.1
  4. Investment News, "E-Trade unveils personal finance planning tool on website," Sue Asci, 05/13/2009
  5. Mobile Banker, "Web Brokerages Push Smart Phones' Trading Capabilities," Michael Sisk, 07/09/2009
  6. Business Exchange "E*TRADE Partners With PNC to Add Fee-Based Managed Portfolios" 2/9/10
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