It was only a matter of time. Every new bull market seems to entice a new generation of day traders. Despite the significant hurdles faced by retail traders in terms of competing with investment banks and hedge funds, sustained market rallies have a way of making scores of retail investors think they're ready to be full-time traders.

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This rally has proved to be no different. Recent media reports show that trading volume at discount brokers such as Charles Schwab (Nasdaq:SCHW) and TD Ameritrade (Nasdaq:AMTD), a unit of Canada's Toronto-Dominion Bank (NYSE:TD), soared 14% in August over July's numbers. What makes this increase all the more impressive is that August is usually one of the lightest volume months of the year.

Now we're not saying that day-trading is for everyone - it's not and frankly, day-trading is one of the riskiest endeavors in all of investing. That said, no matter what your style of investing, there is one constant: Brokers make money on every trade and the higher the trading volume the higher the profits for the brokers. This means that more day trading provides opportunity for investors - and you don't need to be a day trader to take advantage of it. Let's take a look at a few brokers that may benefit from higher trading volume.

  • Knight Capital Group (Nasdaq:NITE)
    3-Month Performance: 31%
    52-Week High: $22.75

  • Charles Schwab (Nasdaq:SCHW)
    3-Month Performance: 2%
    52-Week High: $26.20

  • E*TRADE Financial (Nasdaq:ETFC)
    3-Month Performance: 20%
    52-Week High: $3.91

Not a Quiet Knight
Knight Capital is one of the largest processors of electronic trades. In August, the company saw its average daily volume rocket higher, processing nearly four million U.S. equity orders per day compared with 2 million a day in August 2008. August volume was also up 5.4% from July. In dollar terms, Knight processed $24.2 billion in trades per day in August, up from $22.5 billion in July.

What's noteworthy is the fact that Knight Capital just got quite the bullish mention from a popular television analyst. Even more noteworthy is the fact that Knight is stealing market share from the New York Stock Exchange and has benefited from the collapse of firms like Bear Stearns.

Knight is resting just under a dollar below its 52-week high and has caught the eye of some institutional investors. And, although the stock is up nearly 41% in the past 52 weeks making it one of the best financials, it looks like there may be more to come.

More Than Just a Trade Processor
Charles Schwab does a lot more than just process trades for retail investors. The company provides asset management services, sells mutual funds and offers traditional banking services, including checking and money market accounts, among other things. Charles Schwab has over $1 trillion in assets, so the company isn't too dependent on trading volume, but Schwab's daily trading volume rose 15% in August from July.

Unfortunately, this doesn't mean all is well at the largest U.S. discount broker. Schwab is facing some hurdles in the form lower fees from managed accounts and declining interest rates. This means the company will have to waive about $80 million in money market fees. Schwab said in July it could waive as much as $200 million in fees this year and that's not good news for a fee-based company like Schwab.

With $1.56 billion in debt and trading at nearly 19 times forward earnings, there might be better opportunities among the brokers than Schwab at this point.

A Speculative Play
E-Trade has fallen on tough times over the past year, losing nearly 50% of its value due to its exposure to risky mortgage loans. Two years ago, E-Trade was a $25 stock, now it sells for less than $2. While E-Trade's daily average revenue trades were up 37.4% in August, the company was directed by the Office of Thrift Supervision to put another $100 million of capital into its bank to bolster its capital position.

At this point, E-Trade is a play on a possible acquisition by a larger rival. Toronto Dominion, Schwab and Wells Fargo (NYSE: WFC) have all been mentioned as possible suitors for E-Trade, but it appears an acquisition won't happen until 2010, at the earliest. Even then, a buyer would have to offer at least $4 a share to make it worth holding E-Trade's shares until a buyout materializes.

The Choice Is Clear
The stocks we've highlighted here are a mixed bag. E-Trade is a speculative play at best. Schwab has long-term potential, but is facing short-term headwinds. That leaves us with Knight Capital, which is the best of the stocks mentioned here and probably the best way to play a new day-trading boom. (For more, see Full Service Brokerage Or DIY?)

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Tickers in this Article: NITE, ETFC, SCHW, TD, WFC

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