Volatility Is Good News for E*TRADE, Other Online Brokers

April 16, 2018 — 1:10 PM EDT

Volatility is back, and the discount brokerages are applauding it. While it may create panic for investors, for the likes of E*TRADE, TD Ameritrade, Charles Schwab and TradeStation, it's welcome news.

That's because, in times of stock market volatility, active investors tend to trade more, boosting the fortunes of the brokerages they work with. This was the case with The Charles Schwab Corporation (SCHW) when it reported first quarter earnings earlier on Monday, April 16, and it also applied to TradeStation when it reported a year-over-year increase in daily average revenue trades (DARTs) for March. It is also expected to boost the fortunes of E*TRADE Financial Corporation (ETFC), which reports quarterly earnings on Thursday, April 16, after the close of trading, as well as TD Ameritrade Holding Corporation (AMTD), which weighs in on April 24 before market open.

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The investment firm Sandler O'Neill told CNBC in a recent report that equity volumes were about 20% higher in the first quarter on a sequential basis and that retail trading was stronger. DARTs for the industry were up close to 45% from a year ago during the first three months of 2018. Also helping some of the brokerages, said Sandler O’Neill analyst Rich Repetto, is interest on the part of retail investors in cryptocurrency and pot stocks. E*TRADE, TD Ameritrade and TradeStation all offer customers access to bitcoin futures from CBOE World Market and CME Global. Repetto noted that, when TD Ameritrade and E*TRADE reported earnings in January, 9% to 10% of trades were from bitcoin and pot stocks. Moreover, rising interest rates bode well for the discount brokerages given most have a bank that will see profits go up as rates move higher.

Earlier Monday, Schwab confirmed some of these factors, weighing in with fiscal first quarter results that surpassed Wall Street views on both the earnings and revenue front. The San Francisco-based discount brokerage, the first of the group to release quarterly earnings, reported net income of $783 million, up 39% year over year. Adjusted earnings per share came in at $0.55, while revenue for the first three months of the year was $2.4 billion. Wall Street was looking for EPS of $0.53 and revenue of $2.36 billion.

Heading into earnings, concerns were mounting that the volatility in the stock market could move investors to sit on the sidelines, but Schwab said that engagement remained strong during the quarter, even with the February correction. Trading activity in the first quarter jumped 40% year over year, while new accounts totaled 443,000, the highest quarterly level in 18 years. New customers for its retail business jumped 42% year over year. Schwab also reported net new assets of $65.6 billion, which the company says implied an annualized growth rate of 7.8%, a level it hasn't seen since 2008.