Daily Average Revenue Trades (DARTs)

What Are Daily Average Revenue Trades (DARTs)?

Daily Average Revenue Trade (DART) is a metric used in the brokerage industry. DART traditionally represented average trades per day that generated commissions or fees. However, some brokerages expanded the definition of DART to include many commission-free trades as zero commissions became the norm in 2019.

Understanding Daily Average Revenue Trades (DARTs)

DARTs are monitored by analysts who follow the brokerage industry because they measure how well brokerages are doing in generating revenue from commissions. Commissions were historically a significant source of profits, especially for discount brokerages. Since total profits from commissions are a function of DART, the DART for a brokerage can help to predict quarterly earnings. An increasing DART value suggests that earnings will be higher, while a declining DART metric indicates that earnings may decrease.

Industries typically have their own nonfinancial operating metrics that show how a company is performing. In the retail industry, companies report same-store sales, representing how stores that were open for a full 12 months in the past year have performed. Sales per square foot is another measure retailers employ to gauge single-store performance. In the hotel industry, RevPAR, or revenue per available room, is a standard operating metric. In the airline industry, carriers typically report their revenue per seat/mile along with standard financial results. Operating metrics such as these enable analysts and others to compare performance across companies and determine general trends in the industry.

Commission Considerations

The general trend toward lower commissions presents challenges for the use of Daily Average Revenue Trade (DART) as a measure of success and predictor of earnings. The first issue that arises is the possibility of misinterpreting an increasing DART value as necessarily a sign of rising profits. A brokerage that sees DART increase by 50% after cutting commissions by 50% is going to have lower total earnings from commissions.

The increasing number of brokerages offering commission-free trading is a more significant challenge to DART. When Robinhood started offering free trades in 2014, many observers wondered how Robinhood was going to make money. In late 2019, many major brokerages cut commissions to zero to remain competitive with Robinhood and other firms.

Types of DARTs

With the arrival of zero-commission trades, brokerages took different approaches to DARTs.

Traditional DARTs

Charles Schwab continued to use the old definition of DART until Oct 2019, which resulted in DARTs dropping dramatically after Schwab cut commissions to zero. It is increasingly clear that maintaining the traditional definition of DART means that the metric is bound to decline or even fall to zero for most brokerages. At the very least, traditional DARTs will no longer be useful for making comparisons between brokerages.

The best argument for continuing to use the traditional definition of DART is that trades will not be a significant source of revenue in the future. Under this scenario, brokerages will have to make money from annual fees for funds, providing information, and other services. DARTs would then gradually become a part of stock market history without any remaining practical applications.

Expanded DARTs

In 2019, E*TRADE decided to expand its definition of DARTs to include all trades that generate payment for order flow, commissions, or fees. Expanded DARTs count zero-commission stock trades, all ETF transactions, and even no transaction fee mutual fund trades if they generate payment for order flow. Payment for order flow is the key to the value of the expanded DART definition. Since brokerages are still making money from payment for order flow, having more of these DARTs increases revenue.

The success of the expanded DART definition depends on how much payment for order flow contributes to brokerage profits. While payment for order flow seems likely to generate lower profits than commissions, profits from annual fees and other traditional sources have also been declining.