A typical discount brokerage firm like E-trade or TradeKing makes money in 2 ways. First by commissions charged on trading carried out by its customers and difference in rates that it pays its clients for keeping their money and lending out the money to clients and potential borrowers.
2009 has been a terrible year for both of these revenue streams for a typical discount brokerage firm. There has been talk of consolidation in the industry like the recent purchase of thinkorswim.com by TD Ameritrade. In the last 1 week 2 big discount brokers Charles Schwab and TD Ameritrade posted their Q4 earnings. The Q4 earning of Charles Schwab was down 47% while TD Ameritrade was down by 26%. The biggest impact at both firms was due to lower trading activity. TD Ameritrade also had one time cost of acquisition of thinkorswim.com
So what does 2010 keep in store for these online discount brokerage firms? There would definitely be much more consolidation in the industry. There are already talks about TD Ameritrade intention of buying E-trade at right price. Also Obama new plans to regulate big banks might help discount brokerage firms since big banks like ING and BOA would not be able to compete with discount brokerage firms in providing brokerage services. This means less competition and more margins.
Analysts at CompareBroker are continuously monitoring the situation and are still recommending opening account with TradeKing for their low commission rates and no hidden fees.