Clients of discount brokerages Charles Schwab Corp and E*Trade Financial pulled back in November, trading less amid the volatility that has shaken the markets due to concerns over Europe's debt crisis and a sputtering global economy.
Schwab said on Wednesday that fourth-quarter earnings per share will likely be 4 cents to 6 cents lower than the third quarter as trading activity falls and near-zero interest rates squeeze margins.
Analysts had been expecting the No. 1 discount broker to report earnings per share of 16 cents, compared with 18 cents in the third quarter, according to Thomson Reuters I/B/E/S.
Shares of Schwab were down 3.6 percent at $11.11 in afternoon trade.
"Just when you think things can't get worse, they seem to get worse," said Ed Ditmire, an analyst with Macquarie Grou p .
In months past, investors scrambled to keep up with market fluctuations, trading more and giving retail brokers a bump in trading commissions that helped soften the blow of profit-sapping , near-zero interest rates.
Schwab's November metrics pointed to a reversal in that trend. Its clients made an average of 433,500 daily trades in the month, up 5 percent from a year earlier but down 15 percent from October. Trading has weakened further in December, said Joe Martinetto, Schwab's chief financial officer.
"Consistent with broader market trends, client trading activity has continued to slow thus far in December -- average daily trades are down approximately 8 percent from November," Martinetto said in a statement.
Alex Kramm, an analyst with UBS, reacted to Schwab's guidance by lowering his fourth-quarter earnings estimate to 13 cents a share from 15 cents.
Schwab said an increase in prepayments of agency-issued mortgage-backed securities held in Schwab's investment portfolio as a result of lower interest rates was adding to pressure on its bottom line.
The company said the higher prepayment rates were leading to higher-than-expected amortization of related purchase premiums, and said this would likely lead to a net interest margin lower than the 165 basis points it had forecast.
"Given the current operating environment, we expect the company's fourth-quarter earnings per share will be 4 cents to 6 cents per share lower than the prior quarter," Martinetto said.
TRADING LEVELS ALSO DOWN AT RIVAL FIRMS
Separately, rival online broker E*Trade said on Wednesday its clients made 141,361 daily average revenue trades in November, down 11 percent from a year ago and off 10 percent from October.
Credit Suisse analyst Howard Chen said he expects E*Trade to report daily average revenue trades of 143,000 overall for the fourth quarter, implying an 8 percent to 10 percent pullback in December.
E*Trade shares were down 5.8 percent at $8.08.
Last week TD Ameritrade reported an average of 377,000 client trades daily in November, down 7 percent from a year earlier and down 4 percent from November 2010.
Its shares were down 2.6 percent at $15.20.
"The brokerage segment is tough to invest in right now because its core fundamentals, which are everything from interest rates to the Main Street U.S. investor , have been pretty turbulent and it's not really clear that those things have bottomed out yet," Ditmire said.
"It's hard to say whether they are cheap or expensive when their earnings are still in flux."
Richard Repetto, a New York-based analyst at Sandler O'Neill, said that while earnings estimates for Schwab will come down, it is unlikely they will fall very much.
"A lot of this is transitory and, not completely isolated, but mainly focused in 4Q , " he said.
Schwab said it brought in $6 billion in net new assets in November.
Total client assets were $1.67 trillion, unchanged from October and up 10 percent from a year earlier.
The company ended the month with a record 8.5 million active brokerage accounts, helped by the integration of options trading specialist optionsXpress, acquired in the third quarter.
(Reporting by John McCrank in New York; Editing by Chelsea Emery and John Wallace)