Where the Day Trading Money Is

TradeStation (Nasdaq: TRAD  ) is a pioneer in using the PC for sophisticated investment analysis. Back in 1982, when the company started, the tools were quite crude. Of course, now the company has turned its software into an electronic trading platform. At the core of it is a sophisticated programming tool, EasyLanguage, that allows for testing, monitoring, and automating the execution of trading strategies.

Obviously, TradeStation is geared for the pro, such as hedge fund managers, institutions, exchange members -- and day traders. However, since TradeStation relies mostly on technical analysis, the appeal is really to day traders.

Yesterday, the company announced its quarterly results. Third-quarter revenues came in at $17.2 million, which was a 7% increase from the same period a year ago. Net income was $2.9 million, which was a decline from last year's $3.5 million.

A big part of the reduction in profits was TradeStation's investment in becoming a self-clearing brokerage firm. This makes it more convenient for TradeStation's customers to execute their trading strategies. It should also lead to annual cost savings of $4 million.

Early this year, Bill Mann wrote a profile on TradeStation. His conclusion was that the growth depends on, well, "speculative excess." Basically, it is difficult to sustain a business based on the boom-and-bust cycle of day trading.

It should be no surprise that the average client for TradeStation makes nearly 500 trades per year (half of them in Taser (Nasdaq: TASR  ) ) and has an average account balance of close to $100,000 in equities. The challenge is to find these types of customers. Over the past year, TradeStation grew its number of brokerage accounts by 46% to 16,496. Like its other brokerage rivals -- such as Ameritrade (Nasdaq: AMTD  ) and E*TRADE (NYSE: ET  ) -- TradeStation has no choice but to make heavy marketing and advertising expenditures. In fact, the company hired Omnicom Group (NYSE: OMC  ) to produce television commercials.

Many of those same day traders using TradeStation to make their trades might also be contributing to the stock's volatility. Yesterday, the stock dropped nearly 8% to $6.13.

Related commentary:

The Fool does not think day trading is investing. But it does advocate using a discount broker for your stock transactions. Why pay more when you don't have to? If you're looking for a broker, visit our Broker Center for advice and deals.

Fool contributor Tom Taulli does not own the stocks mentioned in this article.


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