Discount brokers are feeling the effects of retail investors’ reluctance to trade amid ongoing economic uncertainty, reports Fitch Ratings.
The rating agency says that the desire of many retail investors to remain on the sidelines “is hitting U.S. discount brokers hard”, and curbing the outlook for industry revenue growth. Fitch Ratings says that while second quarter financial results for discount brokers, such as Charles Schwab and TD Ameritrade were satisfactory, this was largely because of their banking revenue growth. Their results also revealed significant declines in retail trading volumes, it notes, and the firms reported that they are seeing some pressure on pricing too.
Fitch says that Schwab reported that average daily trades fell by 10% sequentially in the second quarter; and E-Trade reported that average daily volume in the second quarter fell 6% year over year and 12% sequentially. And, earlier this month, the World Federation of Exchanges reported that global equity trading volume in the first half of 2012 was down 14% year over year.
Beyond the discount brokers, the shift in asset allocation trends for investors is confirmed by the results from other institutions, Fitch notes. It says that both State Street and Northern Trust indicated on their earnings calls that second-quarter funds flows continued to move away from equity and actively managed products toward fixed-income and passive investments.
The rating agency says that it believes that the decline in trading activity “is further evidence of a broader shift in sentiment as global market turmoil and uncertainty over events in Europe push more individual investors away from active trading positions.” It remains to be seen whether this shift is temporary, or represents a secular change in small investors’ appetite for stocks, it notes.
If the decline in retail trading persists over the long term, Fitch says that the discount brokers’ move to diversify their business models over the last several years — with areas such as banking and asset management becoming larger parts of their businesses — should provide some brokers with improved operating flexibility.