Online trading volume sinks after market turmoil

After surging 70 percent in the first quarter, the number of online transactions handled by online brokers is expected to decline by 33 percent in the second quarter, Stephen Franco, an analyst with US Bancorp Piper Jaffray, said today.

As a result, Franco and Gregory Smith, an analyst with Chase H&Q, today lowered their revenue and earnings estimates for E*Trade and Ameritrade.

Driving the decline in trading volume is a nasty plunge in tech stocks, as investors with tech-heavy portfolios choose to sit on the sidelines. The slowdown is expected to hit online brokers especially hard because active traders tend to use such services more than brick-and-mortar counterparts, which derive much of their revenue from underwriting initial public offerings and handling mergers and acquisitions.

"We usually see a slowdown in volume in the June quarter, but not a negative growth rate. This slowdown is more than a seasonal pattern. Last year, the June quarter was up 8 percent to 10 percent sequentially," said Franco.

Franco lowered his earnings estimate for E*Trade to $326 million from $364 million for the second quarter. Earnings are expected to drop to break even, down from a previous estimate of 1 cent per share in profit.

Smith lowered his revenue estimates by about 9 percent to $325 million but maintained his break-even estimate for earnings. In the previous quarter, E*Trade posted revenues of $407 million and break-even earnings.

Both analysts expect E*Trade's volume to fall about 30 percent to 160,000 average daily trades, compared with 229,000 average daily trades last quarter.

As for Ameritrade, Smith lowered his revenue estimate by about 6 percent to $150 million, although he maintained a break-even earnings forecast. Franco also lowered his revenue projections, but he cut his per-share earnings estimates to a loss of 2 cents from a profit of 1 cent. Ameritrade generated revenues of $170 million in the previous quarter and a profit of 2 cents.

Smith and Franco expect Ameritrade's average daily online trades to fall between 19 percent to 29 percent. Last quarter, the company reported 229,000 average daily trades.

"Although we have been forecasting a sharp sequential decline in online volumes since the beginning of the quarter, the continued malaise through June is causing us to slightly lower our (estimates)," Smith wrote in a report.

Shares of Ameritrade were down earlier in the day to as low as $11.63, but recovered in late trading to $12.19, up 19 cents. E*Trade was up 38 cents, or about 2.3 percent, to $16.38 in late trading.

Analysts, meanwhile, are keeping a wary eye on the seasonally slow third quarter.

"It's too early to handicap the September quarter. It's going to depend more on what happens to the stock market than any seasonality," Franco said. "If the markets come back strong, we may have a good September quarter."

The September quarter last year marked the first time the industry experienced decline in volume compared with the previous quarter. The drop, however, was a relatively small 8 percent.