Yesterday I wrote about the inevitable wave of consolidation in the online retail brokerage industry.  With the slow down in online trading as a result of the market turmoil (individuals trade less when the markets are not going up) online brokers face important strategic decisions.  One of the main challenges is to make trading as efficient as possible and gather as many assets as possible on to their platforms.

A vivid example of what is happening to online brokerage is to look specifically at trading commission revenues.  Trading has evolved from a sexy new way to take control of your investing life to a commodity in less than 10 years.  And the data supports that.  I looked at the total commission revenues derived by the three largest online brokerage firms, Charles Schwab, E*Trade, and TD Ameritrade, as a proxy for the industry.  The 10 Year CAGR is 3.9%.  You can see for yourself that total commission revenues have stalled:

It is interesting to see how much trading revenue is effected by recessionary markets, as evidenced by the large hit in 2001 from 2000, and the flat growth through 2006- well after the last bull market began.  It will likely be the case for the next few years that these firms will see more drops and then a soft recovery for the next 4-5 years.

Now, the overall numbers mask a bit what is happening at each of the firms.  Even before the acquisition of ThinkorSwim by TDAmeritrade, which makes the combined firm the largest in terms of trades per year, TDA was generating the most in commission revenues.  With its focus on trading, ThinkorSwim is a natural strategic move for the firm.

E*Trade has its well-documented balance sheet problems, but its trading business is healthy.

Schwab, seeing these trends, has made a conscious move away from transactional revenue and into fee-based services.

It is going to be interesting to see how the major players react to these trends and the market over the next few years.