More Consolidation in Online Brokers Looks Likely

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Includes: AMTD, IBKR, TRAD
by: Zack Miller

While markets continue to confound individual investors as they sit on their hands pondering what to do next, active investors continue to trade and trade a lot. Perhaps that’s why Interactive Brokers (NASDAQ:IBKR) disclosed a tender offer for more than 6% of Tradestation (NASDAQ:TRAD) stock.

And it seems to be a good match for a possible future M&A as these two online brokers cater to active traders.

From a recent note published by Sandler O’Neil:

A potential match — both broker dealers are highly focused on active traders. Interactive Brokers’ 150,600 accounts are highly active traders averaging 136 trades per quarter in 3Q10. Similarly, TradeStation’s 47,400 accounts averaged 102 trades per account in 3Q10. While both firms are known for their technology, TRAD has utilized its “historical back testing” capabilities to attract clients. By contrast, TD Ameritrade (NASDAQ:AMTD), Schwab (NYSE:SCHW) and E*TRADE (NASDAQ:ETFC) accounts averaged 3.7, 1.9, and 3.1 trades per account in 3Q10. Bottom line, there are similarities in the hyperactive customer bases of Interactive Brokers and TradeStation.

We saw Ameritrade enter this market with their successful purchase of Think or Swim, another brokerage platform focused on aggressive traders. With more transactions per account, I do think it’s likely that more consolidation occurs in this subset of the market as historically low interest rates make plain-vanilla brokerage business less interesting.