) is an online brokerage that allows individual investors to trade
equities, options and other securities. Ameritrade also offers
money market account services to clients through TD Bank USA. It
competes with other online brokerages and financial services firms
like E-Trade (
), Charles Schwab (
) and Bank of America (
Our price estimate for Ameritrade stands at
, in line with market price.
Understanding Options Trading
Options are contracts that allow parties to buy or sell assets -
generally shares - at a pre-determined price. The popularity of
options comes from the concept that the buyer of an option does not
have the obligation to complete the asset transaction. The buyer
essentially holds a right to complete the trade if it is
Standardized options contracts are listed and traded at various
futures and options exchanges around the world. With the number of
retail investors exploring options trading along with normal equity
trading on the rise, all online brokerage firms allow investors to
undertake options trading. This works out to the advantage of the
brokerage firms, as they normally charge higher commissions for
executing options trades.
Ameritrade in the Game
Ameritrade, like its competitors, provides customers with a
platform to trade in options contracts. In fact, option trades
accounted for 21% of total trading volumes in the December quarter
for 2009. While the company charges $9.99 per equity trade, the
commissions for options trading include an additional $0.75 per
options contract on top of the $9.99 fee. The structure does not
actually put Ameritrade in position to gain much from investors'
increased interest in options trading.
However, Ameritrade's options trading offerings are priced
substantially higher than that of almost all its competitors.
Competitors like OptionsHouse and TradeKing allow customers to
trade in options while charging less than half the commissions and
fees. Their services, notably, are not as diversified as
But Competitive Pressures will Drive Trading Commissions
Lower in the Near Future
Online brokerages have been waging a price war for quite some
time, due to commoditization of their trading offerings. Although
the giants in this industry like Ameritrade, Charles Schwab and
E-Trade provide a larger range of trading options for investors,
the significant price gap between the smaller online brokerages
will likely force fees down south in the near future.
See our full analysis and $22.65 price estimate
We estimated that Ameritrade's average revenue per trade will
decline from its current level of $12.6 to nearly $11 by the end of
our forecast period. However, should Ameritrade slash its fees for
options and other futures trading, which made up 30% of all trades
in 2010, it could potentially reduce this average revenue per trade
to just above $9 by the end of our forecast period. This represents
a 6% downside to
our $22.65 price estimate
, dropping our number below $21.50.