| 07 July 2010

Interactive Brokers (IBKR) checked in with June monthly brokerage metrics, giving us a sneak peek at their Q2 earnings, which aren't scheduled for release until the third week in July. Unlike most brokers, who dovetail their June metrics with their quarterly release, Interactive Brokers let's us have a quick monthly update before they wrap up the quarter. This gives us a unique opportunity to assess how the quarter might play out for online brokers. The prognosis is not good.

Before we begin, we should remind readers that the overall performance of the markets usually has a direct impact on the performance of the brokers. This can sometimes effect DARTs, but it usually impacts their growth, or lack thereof, in assets. June was a rocky month indeed for the markets. While the S&P 500 was up several percentage points in the middle of the month the index eventually closed down 4.24% on the month.

Interactive Brokers, for its part, struggled mightily against this current, but the firm ultimately lost ground. We take a look at their performance by first analyzing DARTs. While the firm experienced a nice pop in activity in May (which all brokers experienced) their subsequent June activity brought the firm back down to earth. The 25% drop in trading activity brought them in-line with level activity we were seeing from the firm a year ago.




But trading activity doesn't mean much to brokers anymore, since the broker price war erased all hope of generating a profit from trading activity. Of course this has always been the case for Interactive Brokers since their costs have always been low. The firm tended to rely more on margin interest and market-making activity to generate revenue and profit. Thus, customer assets play a pivotal role in the firm's ability to produce results. Unfortunately the firm was merely treading water on his front. And in fact, they lost ground during the quarter. We expect this to have a significant impact on the firm's ability to post revenue growth.




One other element that can play a significant role in asset growth is the number of new accounts. We were hoping to see a lot of new activity for the firm, especially given their relationship with new account/lead generating relationships with firms like kaChing and Covestor. Unfortunately, this did not seem to be the case. In fact, the pace of new account growth for the firm actually fell during the quarter.



This foretelling does not bode well for the other brokers. While we don't have any hard evidence pointing to the correlation between the early results released by IBKR and subsequent results released by other online brokers, we intend to track and watch closely this potential going forward to look for signs of a correlation. But if you're asking for a hunch -- our hunch is that we're in for some rough quarterly reports.

One aspect of quarterly reporting that we particularly look forward to is the release of marketing and advertising spending data. These spending figures give us a chance to assess just how effective each of the brokers has been at acquiring new accounts. We are particularly interested in E*TRADE Financial's (ETFCD) ability to acquire accounts given the dramatic increase in new accounts in April (versus a loss of accounts in March) and the comments made by their CEO that he was pleased with their progress and intended to spend more.

Most firms only report these figures on a quarterly basis. But TD Ameritrade (AMTD) doesn't even release new account figures but once a quarter. So we're also very curious to see how they have been progressing relatve to other brokers. Stay tuned.