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Three Online Brokers Worth Watching

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TD Ameritrade, Schwab, OptionsXpress all primed to emerge as winners.

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Online Brokers

Earlier in the week, I took a look at the publicly traded exchanges as to whether they represented attractive investment opportunities. Today I want to look at online brokers. If the exchanges are the casinos of the industry, then the brokers are basically the travel agents. We, the investing public, are the rubes -- I mean, the customers.

Right now, as in many other industries, discount online firms are faring better than their full-price counterparts.

Many firms, such as Schwab (SCHW), TD Ameritrade (AMTD) and OptionsXpress (OXPS), which have a focus on active traders and, more specifically, on those who use options, could be poised to not only ride out this bear-market storm, but to emerge among the few winners.

Bulge-Bracket Bust

These traditional "discount" brokers are benefiting from the loss of confidence in the big bulge-bracket firms. In the wake of the collapse of Lehman, and the government-directed rescue of Merrill Lynch, along with numerous regional bank failures, customers not only became skeptical regarding the value of their so-called expert advice, but completely lost trust in the system. Brokers, money managers, and mutual funds seemed to be in cahoots to generate fees and hefty paydays for themselves, with little regard to delivering long-term value for their clients -- or even for protecting their principal investments.

Individuals are now taking a more hands-on and proactive approach toward their investment and retirement accounts, which has caused a shift to lower-cost online brokers that offer a full range of products, research tools, and a reasonable level of support.

More Active Assets

Some recent earnings reports provide clues to where customer money and assets are being directed. The 3 firms mentioned above -- Schwab, Ameritrade and OptionXpress -- all posted better-than-expected earnings for the first quarter. Granted, the numbers were broadly lower compared to first quarter 2008. More importantly, assets under management saw a consecutive quarterly increase and project, on average, 25% earnings growth for the year.
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No positions in stocks mentioned.

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