E*Trade Discusses Increasing Returns to Scale in Online Finance and the Brown Acquisition (ET, JPM)

Includes: ETFC, JPM

Comments from E*Trade (ticker: ET) CEO Mitchell Caplan in his September 29th conference call to discuss E*Trade's acquisition of Brown from JP Morgan:

Brown brings approximately 200,000 high-value accounts carrying total assets of nearly $30 billion of which over 3 billion is in the form of cash plus another 3 billion of margin borrowings. In addition, as I said earlier, these customers are among the most active in the industry generating approximately 36 annual trades per account, about six times more active than our current average customer, yet similar in behavior to many of our own active serious investors.

The additional 28,000 trades per day from Brown's customer base will drive value in two ways. First, since we remain in a place where we have excess capacity in our core transaction processing plant, these trades are expected to deliver an incremental pretax margin of 85%. This is consistent with what we receive on an incremental trade above our breakeven point today.

The second benefit involves the value of greater scale. We estimate that the additional trading volume from Harrisdirect and Brown will reduce our breakeven point to 15,000 trades per day from our current stand-alone level of approximately 45,000 trades per day. As a result we will be generating this incremental margin on a larger pool of our total trading volumes.

(Quotes are from the CCBN StreetEvents transcript.)