Wall Street was impressed with the third-quarter results Charles Schwab
Schwab, the largest independent brokerage by client assets, posted its first gain in revenue in more than two years. The company's slightly stronger-than-expected quarter got a boost from a continued downtrend in money-market mutual fund fee waivers: $93 million for the quarter, declining from a second-quarter total of $113 million, and $125 million in the first quarter.
As a result of extremely low interest rates, money-market fund rates have been so low that if brokerages charged customers fees, these customers could suffer a loss just for holding their cash in a money market fund. This has forced Schwab and many of its competitors to waive these fees in order to maintain their client base. Even banks not competing in the discount brokerage space are feeling the pain from fee waivers. Bank of New York Mellon
Schwab is also losing revenue from the continuing ETF battle with its competitors. Just this month, TD AMERITRADE
However, Schwab and its competitors are most gravely hurt by a dropoff in trading volume, and retail investors' lackluster interest in the market.
Trading remains muted
Schwab saw trading revenue decrease by $182 million, a 24% year-over-year loss. The number of shares traded fell 15% year over year, and the company also took a hit from the lower commission fees it began charging in January. TD AMERITRADE recently reported that in August, its own average daily client trades dropped to their lowest levels in 18 months.
As I wrote last month, the lack of trading volume has hit most financial institutions hard. In September, investment bank Jeffries
Mutual fund outflow
Another important indicator of retail investor interest in the market is the weekly Investment Company Institute report on mutual fund flows. Unfortunately, it's not looking good. Last week marked the 23rd consecutive week in which money has flowed out of domestic mutual funds. So far this year, mutual fund investors have redeemed a total of $80 billion.
While some may point to this as a contrary indicator, the data doesn't lie. This certainly isn't good for brokerages or financial institutions, which gain important revenue dollars from trading.
The Foolish bottom line
While Schwab's first revenue gain in more than two years shows that the company's operations are improving, I believe that the company will need to see an improvement in trading volumes from retail investors to keep this success going. Investors should keep a close eye on upcoming reports from TD AMERITRADE and E*TRADE
Andrew Bond owns no shares in the companies listed. Charles Schwab is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.