US brokerages rebound on equity rally

US brokerages on Thursday unveiled further evidence of a rebound after the “flash crash” and fears of a double-dip recession caused an exodus of investors from US markets last year.

Volumes dropped in 2010 after the the May 6 flash crash, when the S&P 500 index fell 6 per cent in 20 minutes before rebounding, sparking inquiries by lawmakers into the stability of the US market structure.

However, a surge in US stock prices in the most recent quarter, which has begun to draw traders back to the market, has benefited the brokers, some of which reported fourth-quarter earnings on Thursday.

At Knight Capital, the largest US electronic trading group, revenues increased 8 per cent from the third quarter to $259m, although they were still down 14.5 per cent from a year ago. The strongest growth in the quarter was in trading revenues, which rose 21 per cent.

Raymond James, the US investment bank, also reported an uptick in capital markets activity, led by mergers and acquisitions and retail customer trading. Investment banking revenue added 12 per cent quarter-over-quarter, to $59m, while trading commissions were up 7 per cent, to $534m.

Income from private clients, or individual traders, was up 5 per cent in the quarter as retail traders took more aggressive bets and used higher margin, said Douglas Sipkin, analyst at Ticonderoga Securities. Overall net income was up 18 per cent quarter-over-quarter, to $81.7m.

Meanwhile, Knight’s trading volumes outpaced the broader market’s, as its platforms increasingly attracted investors who use trading algorithms rather than going directly to exchanges.

In the fourth quarter, Knight’s average daily dollar volume of trading increased 4.9 per cent over the third quarter, versus a 4.6 per cent decline in average daily volume for the broader US market, according to figures from Sandler O’Neill.

Knight’s aggressive expansion earlier in the financial crisis continued to hurt results, however, following the trading slowdown. Knight’s net income fell 79 per cent year-over-year to $9.23m in the fourth quarter, for earnings of 10 cents per share, below consensus of 20 cents, as compensation costs exceeded estimates.

Interactive Brokers Group, a market maker and electronic brokerage, reported after the market close a decline in earnings before income taxes in quarter versus a year ago, from $52.2m to $41.9m, as its market making group struggled to compete with high-frequency traders. However, its brokerage business saw quarterly commissions 10 per cent year-over-year, as trading volumes increased 5 per cent.

Knight’s shares were up 7.7 per cent on Thursday, to $14.24, while Raymond James shares added 5.2 per cent to $35.34.

Keefe Bruyette & Woods’s Capital Markets index, comprised of US brokerage and trading groups, is up 21.1 per cent over the past six months, while the S&P 500 index is up 17.7 per cent.