Schwab Bears Brunt of Fall in Trading
In a much tougher market for virtually all online brokerages, No. 1 firm Charles Schwab seems to be having the toughest time of all.
While most of Schwab’s brokerage rivals posted at least some rise in fourth-quarter stock trading activity from the third quarter, online trading by Schwab customers plunged more than 14%, according to Salomon Smith Barney.
What’s more, Schwab last week said that daily trades by its customers averaged 182,000 in the first nine trading days of February, an 18% slide from January’s pace, as small investors’ interest in the market faded further.
That trend led Schwab to warn that it might have trouble meeting even analysts’ lowered earnings estimate of 15 cents a share this quarter. On Tuesday, Schwab shares fell $1.14 to a 52-week low of $21.85.
Analysts say the plunge in Schwab’s trading volume is intriguing because they thought such a decline was more likely to happen to almost any online brokerage but Schwab.
Compared with smaller brokerages catering to hyper-active online investors, Schwab’s client base is viewed as downright staid. Thus, many analysts figured that a continuing market plunge would eat more deeply into business at such firms as Datek and Ameritrade.
But in relative terms, aggressive online investors have stayed active in the market while Schwab’s buy-and-hold clientele increasingly appears to be staying sidelined.
“The buy-and-hold investor has just sort of bailed out on the market,” said Richard Repetto, an analyst at Putnam Lovell Securities.
Rather than trading individual stocks, many Schwab customers seem to have retreated into money-market and other mutual funds. Even as stock trades fell, Schwab customers poured more than $4 billion into mutual funds in January--the second-largest monthly net inflow ever. That included a record $922 million into bond funds.
The question now is whether Schwab customers will stay on the sidelines longer than investors at other brokerages, or whether the market’s next turn could revive their buying--or selling.
Trading activity rose at some online brokerages in January as the stock market rallied. Trading was up 14% at Ameritrade and 6% at Datek from December levels.
Trading also was up 6% at Schwab’s CyBerCorp unit, which caters to active traders.
But at Schwab itself, trading fell 5% in January from December.
Christopher Dodds, Schwab’s chief financial officer, said Schwab’s customers are waiting for “consistent signs” of a market recovery before they return to active stock trading.
“They are trading less frequently. That’s simply a function of the market environment,” he said.
Through early this month, average daily trading activity at San Francisco-based Schwab has slumped a whopping 48% from its March 2000 peak. At Datek, the only other firm to report figures into February, average daily trading has slid 32% from peak levels.
Amid the trading slowdown, Schwab has taken a number of steps to pare its expenses in the last few months.
It asked employees to take unplanned vacation days. Earlier, it temporarily slashed the salaries of top executives, including the firm’s co-chief executives. The firm has said that it is trying to avoid laying off employees.
Schwab’s stock price has been battered ever since the market began sliding steadily in September. At $21.85, the stock is 51% off its 52-week high of $44.75 last March.
Trading revenue--which includes commissions on trades as well as income from its in-house market-making unit--constitutes about 45% to 50% of total Schwab revenue, Dodds said.
To be sure, Schwab still has a lot going for it, analysts say.
Schwab took in $12.5 billion in new assets last month--an impressive feat considering the condition of the market.
“That’s incredible in this market environment,” said Russell Keene, an online brokerage analyst at Keefe, Bruyette & Woods Inc.
The firm also added almost 100,000 new accounts last month.
“It’s not totally dismal,” Repetto said. “It’s just not what it was [in terms of] lucrative trading.”
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Online Brokers Battle for Business
Among major online brokerages, Charles Schwab Corp. suffered the biggest percentage decline in customer trading from the third quarter to the fourth quarter, and Schwab customers’ activity has continued to tumble this year.
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Datek: +8.7%
Ameritrade: +4.9
Scottrade: +2.7
Fidelity: +2.6
TD Waterhouse: +1.2
E-Trade: +0.3
Total of major firms: -1.4
Fleet Online: -1.8
CSFB Direct: -3.9
A.B. Watley: -10.4
Charles Schwab: -14.3
Source: Salomon Smith Barney
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Schwab Trading: Boom to Bust
Average daily trades by customers of online brokerage Charles Schwab peaked at 346,900 in March of last year, but have since fallen sharply as the stock market has slumped. The trading pace in early February was the weakest since October 1999.
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Daily average revenue trades, in thousands
February: 182,000*
* February data is for first nine trading days.
Source: Putnam Lovell Securities
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Wild Ride
Shares of Charles Schwab Corp. (ticker symbol: SCH), which sank to a new 52-week low Tuesday, have gyrated wildly over the last two years.
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Monthly closes and latest for Schwab stock on the New York Stock Exchange
Tuesday: $21.85, down $1.14
Source: Bloomberg News
