TD Ameritrade’s Q2 Update: To Infinity or Oblivion?

“Just when I thought I was out, they pull me back in.” – Michael Corleone, The Godfather: Part III


Chicken or egg?

For today’s story, we know which one came first. However, we may never know for sure which one was the more prominent cause of the recent sustained spike in US stock volumes: A frictionless environment brought on by a zero-commission framework or a high-volatility market brought on by a once-in-a-century global pandemic?

Granted, there may be additional factors at play here. Like the gamification of market interfaces as substitution for a sports apocalypse. People need something to do. And, when confined for extended periods, they will naturally choose paths of least resistance, especially those that entertain, are addictive and tickle financial desires…

This is what one of those paths looks like; notably since March 2020:

Now, I made a point last week, in “Robinhood’s Trailing Stop Orders: Extreme Profitability, By Design,” to say that we would try to avoid seeming redundant in our topical choices, at least for a little while. True, no guarantees were made, but just when I thought I was out, they pull me back in

The convergence of and interplay between these factors – frictionless environments, gamification, attention substitutes, consolidation of market participants (and order flows), among others – have not only significantly expanded global attention to Alphacution’s research; it’s because we are operating within one of the most consequential periods in modern economic history. The evidence has now piled up to the extent that it’s obvious, no matter how much we may want to pretend otherwise:

Technology has significantly disrupted market functioning. And, nothing about that fact is being fixed; not since the GFC, nor in the current uncertainty. Our economic policy responses have not been sufficient to do anything more than delay the impacts of that disruption. With that, the best we can do as analysts is monitor the horizon for the next data point that will inform our interpretations as to the pace of change – and what may come after…

With the consolidations of Schwab-Ameritrade and Morgan Stanley-E*Trade imminent, certain data threads are likely to be coming to an end as of Q2 2020. The chart below is one such example, on the metric of total trades by quarter:

Here, Charles Schwab’s and TD Ameritrade’s total trades for the quarter ending June 30, 2020 have been reported; their variance in growth being indicative of the difference in client demographics between the two firms that will soon become one. As for E*Trade, we found some data reported as of June 12, 2020 claiming that 5 of the firm’s all-time high trading days occurred during the month prior to June 10. Based on this, Alphacution estimated E*Trade’s total trades for the quarter…

(UPDATE 7/23/2020: Since the original publication of this post, E*Trade has reported 63.6 million trades for the quarter ending June 30, 2020. The associated chart, above, has been updated.)

Now, before we try to interpret any meaning from these additional data points, there’s one more juicy tidbit to throw into the mix before we do: TD Ameritrade’s order routing revenue for the quarter of $340 million – up over 50% from quarter ending March 31, 2020 – and a level that indicates total order routing revenue approaching $700 million for the quarter ending June 30, 2020 (which would be up about $200 million from Alphacution’s identification of ~$500 million in order routing revenue for the March 2020 quarter across 13 players so far).

(UPDATE 7/23/2020: Since the original publication of this post, E*Trade has reported $120 million in order routing revenue for the quarter ending June 30, 2020, up 41.2% on a QoQ basis; 166.7% on a YoY basis. The associated chart, below, has been updated.)

Taken together, some may read these data points as an increase in retail trading being the driving force behind much of the overall increase in market volumes and elevated volatility. This was the interpretation offered by Citadel Securities’ head of execution services, Joe Mecane, in a July 9 interview with Bloomberg wherein he claimed that retail volumes represented as much as 25% of market volumes during peaks. (Alphacution is currently working on its own estimate of retail order flow penetration.) And, with the “stay-at-home” era likely to continue – at some level – indefinitely, whose to say that these metrics don’t remain elevated for a while?

However, consider that among the many apocalyptic clues weighing on the unsustainability of these extremes, two stick out: 1) the S&P500 is more concentrated by market capitalization in the 5 largest stocks than ever before (including about 25% higher concentration than the bubble), and 2) Jay Powell claims “we won’t run out of money,” which is quite ironic as he controls the knob where the moneyness of our money is being relegated to an economic oblivion…

Until next time…

By | 2020-07-23T20:10:01-04:00 July 23rd, 2020|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.