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Online Brokers Down on Disappointing Near-Term Prospects

Swayta Shah

Over the last couple of days, online brokers – Charles Schwab SCHW, TD Ameritrade Holding AMTD and E*TRADE Financial ETFC – have witnessed a fall in their stock prices. Since the end of last week, shares of both Schwab and TD Ameritrade have declined 3.4%, and E*TRADE has lost 3.8%.

Stock price movements happen on a daily basis, so what’s different here?  A couple of major developments have occurred over the past few days, which are likely to impact the online brokers’ financials significantly.

First is change in the Federal Reserve’s stance related to interest rates. For the first time since the 2008 financial crisis, the central bank seems poised for cut in interest rates (as indicated by the statement issued at the end of two-day FOMC meeting). This, along with steady decline in Treasury yields, will adversely impact these online brokers’ profitability.

Low rate environment will hurt net interest income growth, and lower yields are expected to weigh on securities re-investment yield. Thus, revenue growth is likely to get hampered in the near-term for these online brokers.

These concerns have also been flagged by several analysts, including from Raymond James RJF, Wells Fargo WFC and Deutsche Bank DB.

The second development relates to levy of tax on equity, bond and derivatives transactions. This “financial transaction tax” proposed by Democratic presidential candidate Bernie Sanders will be utilized to pay off nation’s approximately $1.6 trillion of outstanding student debt.

While the plan looks good on papers, it will have a wide-ranging impact as it is expected to disrupt how everyone from the high-frequency traders to pension managers operate. Per the Bloomberg Intelligence analyst, the tax will most likely hurt trading volume as brokers will eventually pass on the cost to customers in form of higher fees.

Though the chances of passage of this proposal is less in the near term, the news has hurt investor sentiments to some extent.

These matters weighed on investors’ sentiments, leading to fall in share prices of Schwab, E*TRADE and TD Ameritrade, which currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Wells Fargo & Company (WFC) : Free Stock Analysis Report
Deutsche Bank Aktiengesellschaft (DB) : Free Stock Analysis Report
The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report
Raymond James Financial, Inc. (RJF) : Free Stock Analysis Report
TD Ameritrade Holding Corporation (AMTD) : Free Stock Analysis Report
E*TRADE Financial Corporation (ETFC) : Free Stock Analysis Report
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