| 22 October 2009

TradeStation Group Inc. (TRAD) reported their third-quarter results this morning. They showed a decline in quarterly revenues of 23% from $41.8 million to $32.4 million. Their net income, though down 57% to $3.7 million for the quarter, met analyst expectations.

Yesterday we reported the odd, but oft-repeated refrain that online brokers insist upon reporting less-than-stellar results by explaining their resilience in an otherwise difficult market. This is odd because for most financial companies this has been a record quarter for performance and profits. Unfortunately the execs at TradeStation have chosen to join the chorus.

“Our third quarter financial performance was solid despite difficult market conditions," said David Fleischman, the company’s Chief Financial Officer.

This is similar to the lament we heard from optionsXpress (OXPS) CEO, David Fisher, ("resilience in the third quarter despite the difficult economic environment") and Charles Schwab's (SCHW) CFO Joe Martinetto ("reflecting the headwinds we’ve been discussing for some time").

TradeStation's CFO explains the challenges thus: "It is important to remember the September 2008 spike in volatility, especially intraday volatility, when looking at year-over-year comparisons in brokerage commissions, as well as the reduction in interest rates when looking at earnings."

We find it hard to believe that a reduction in interest rates and volatility could have so dramatic an effect, or that it at least couldn't be offset by better performance in other areas. (Keep in mind the Fed Funds rate was already down to 2% by Q3 last year and had been there for several months, so this was no surprise.)

The company reported a 10% increase in brokerage accounts to a record total 45,569 and a 12% increase in client assets to, let's call it just shy of $2 billion. True, TradeStation's daily average revenue trades have decreased 27% year-over-year, but they still blow away other online brokers in terms of performance per account. We must remember that the average TradeStation account holder trades much more frequently than your typical online investor. The company touts its metrics as "some of the best in the industry," and claims an average of 445 trades per account per year. This compares with an average of 21 trades per year for a TD Ameritrade (AMTD) account.

So let's review: record increase in number of accounts, record client assets, "some of best" metrics in the industry and a 57% drop in net income. Could it be that all roads lead to the 58% drop in margin balances year-over-year? If so, that becomes our new metric of choice.