TD Ameritrade Holding Corporation (NYSE: AMTD) is an online stock brokerage that executes 371,579 transactions on an average day. Both individuals and institutional investors use TD Ameritrade's service to trade common and preferred stock, ETFs, options, futures, foreign exchange, mutual funds and fixed income securities. TD Ameritrade also offers margin lending and cash management services.
TD Ameritrade's traditional revenue base comes from the transaction-based fees it charges to clients for brokerage and clearing services. This business model has been successful for online brokers because operating costs remain low in the online brokerage industry. TD Ameritrade also generates revenue from the cash in its clients' accounts, by lending out this money to other clients through margin accounts, and to third-party borrowers through affiliate banks.
First Quarter 2010 Results
TD Ameritrade reported revenue of $635 million, an increase of 21% compared to $525 million in the year-ago quarter. Net income increased 23% to $163 million, and EPS increased 17% to $0.27. During the quarter, TD Ameritrade executed an average of 379,000 trades per day. Also, the company acquired $10 billion of new client assets for a record annualized growth of 13%, bringing total client assets to $342 billion. TD Ameritrade opened a record 187,000 new accounts during the first quarter.
|Quarterly Financial Data, in millions||Q1 2010||Q1 2009|
|Transaction based revenues||$301||$265|
TD Ameritrade has a unique cost structure compared to its competitors in the online brokerage services industry. Operating mainly as an online brokerage, maintaining only around 100 brokerage firm locations throughout the United States, TD Ameritrade’s fixed cost infrastructure has allowed for greater financial flexibility and has resulted in one of the lowest operating expense per trade figure out of all the publicly traded brokerage firms. 
TD Ameritrade generates revenue from transaction fees that it charges to its clients and from asset-based revenues.
Over the past five years, TD Ameritrade’s growth in asset-based revenue has outpaced its growth in transaction-based revenue. The amount of revenue generated via transaction fees is directly tied to the performance of the overall economic environment. For this reason, many brokerages have turned to revenue sources that don't directly depend on trading volumes in order to diversify and protect themselves against downside risk.
TD Ameritrade earns commissions and transaction fees on client trades in common and preferred stock, ETFs, options, futures, foreign exchange, mutual funds and fixed income securities. Margin lending and the related securities lending business generate net interest revenue. Cash management services and fee-based mutual funds generate insured deposit account fees and investment product fee revenues.
|Revenues (millions): ||FY2009||FY2008||FY2007|
|Commissions and transaction fees||52%||40.1%||37.4%|
|Net interest revenue||14.4%||21.7%||25.6%|
|Insured deposit account fees||23.6%||24.8%||24.6%|
|Investment product fees||7.7%||12.2%||10.7%|
TD Ameritrade earns asset-based revenue through loans to clients who elect to purchase securities on margin. In margin loans, TD Ameritrade facilitates a loan to the client and charges an interest rate based on the type and terms of the loan to the client. The client pays down the interest and the capital within the period specified. The second way in which TD Ameritrade earns asset-based revenue is through opt-in money management services that it provides to its clients and account holders. Money from these accounts is loaned out to banks (in this case, TD Bank USA). The bank, in turn, makes long term loans on the cash and pays short term rates to the account holder, making a profit on the interest rate spread.
TD Ameritrade offers and facilitates the transaction of corporate stock, fixed income securities, exchange traded funds, options trades, mutual funds, cash management services, and margin accounts. For most of the transaction-based services that TD Ameritrade provides, it charges a fee. Transaction revenue is dictated by the trading volume and the total fees that are collected based on those volumes.
|Total trades (in millions)||93.27||75.72||63.11||54.24||39.94|
|Average commissions and transaction fees per trade||$13.35||$13.44||$12.90||$13.61||$13.37|
|Average client trades per day||371,579||301,061||253,440||216,970||155,696|
|Average client trades per account (annualized)||12.9||11.4||10||10.1||11|
That's way more cveelr than I was expecting. Thanks!
TD Ameritrade faces strong competition, most importantly from Charles Schwab (SCHW),E*TRADE Financial (ETFC) , 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 are competing against firms that offer more advanced guidance for investors. However, E*Trade and TD Ameritrade are divergent with respect to their platform development. TD Ameritrade is still digesting the acquisition of TD Waterhouse and is in the midst of fully integrating the newly acquired RIA network and brokerage locations with TD Ameritrade's technological platform. Further competition is provided by Charles Schwab--which has more comprehensive offerings-- which has been more successful in attaining a greater share of its clients' total assets through a larger, more cohesive network of associated RIAs.
Revenue Composition Comparison: The sources of revenue are different between the competing online broker-dealers. In particular, Charles Schwab is quite different because their main source of revenue is from asset management fees, a source of revenue that E*Trade and TD Ameritrade do not have. Below are the revenue compositions for TD Ameritrade, E*Trade and Charles Schwab. Notice the extent to which E*Trade has moved towards asset-based revenue streams: 58% Net Interest Income vs. 41% and 34% at TD Ameritrade and Charles Schwab, respectively. This shows E*Trade's aggressive move towards a new business model that is less reliant upon trading based revenue streams. 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.
Notice the difference in revenue composition. E*TRADE Financial (ETFC) generates more than half of its revenue from interest income, which would make it the most exposed to any collateralized debt obligations and/or mortgage backed securities that the brokerage would be responsible for fulfilling as a result of their sweep account operations. Relative to E*TRADE Financial (ETFC) , Charles Schwab (SCHW) generates a greater proportion of its revenue through asset management fees, which would make its balance sheet the most exposed to any reduction mass market brokerage transactions.
|Operating Metrics||E*Trade||Charles Schwab||TD Ameritrade|
|Average Commission Per Trade||$11.73||$14.01||$12.90|
|Daily Average Revenue Trades (DARTs)||187K||245K||253K|
|Net Revenues (MM)||$3,570||$4,994||$2,177|
|Net Income (MM)||$-1,442||$2,407||$645.9|
|Client Assets Under Control (AUC) (bn)||$190||$1,445||$302.7|