TD Ameritrade 1Q14 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Strong asset gathering in both retail and institutional channels

“Both our retail and institutional channels continue to exhibit strength in asset gathering.”

Continued retail reengagement

“Our retail channel had its best quarter for net new client assets in three years continued retail reengagement combined with heavier media spend for the Olympics and retirement season yielded a significant increase in traffic to our Web site. This combined with improvements we made to our online account opening process have resulted in strong new client acquisition.”

Volatile markets drive engagement

“The S&P 500 moved 1% or more 25 days within the quarter compared to 12 days in the same quarter last year. Nearly every client engagement metric from logins to number of accounts that traded was up for the quarter. More clients were logging in; more clients were logged in were trading, and more of the clients trading where trading more. Engagement was up across all four of our key platforms with mobile leading the way.”

Retail investors are increasingly bullish

“Retail investor behavior continues to suggest an increasingly bullish sentiment.”

More investors reengaging with the market who need education tools

“as investors continue to reengage with the markets, we’re seeing more client interest in tools and education.”

1Q is retirement season

“We’ve just come out of retirement season, our busiest time of the year with strong results as we finish the first half of fiscal 2014 with 27 billion and net new client assets at 10% annualized growth rate”

Client cash at lowest levels since September 2007

“client cash as a percentage of total client assets ended at 14.8% in the quarter, slightly below our historical range of 15% to 20% and the lowest we’ve seen since September 2007.”

Most high frequency trading has helped retail investors

“Take for instance high frequency trading. This is a term with no agreed upon definition. That means different things to different people. But based on our analysis, there is no question that the regulatory changes and the electronification of the markets, including most high-frequency trading techniques have been good for retail investors.”

There are some bad techniques, which should be addressed

“With that said, there are some techniques that may be harmful and undermine the credibility of the markets. These are areas that should be addressed, but we encourage a thoughtful fact-based review to get at the heart of the issue and the root causes and if predatory practices exist, they should be addressed.”

High frequency trading is technological advancement

“to broadly say that all high-frequency trading is bad is like saying that the advancement of technology big data and analytics is bad. The fact is that the retail investor has never had better access to the markets or better execution quality. 10 years ago, 10 second executions were the norm. Now they happen in less than a second.”

TD doesn’t internalize orders

“we do not internalize orders. We believe that turning all client orders back to the market is more transparent and better aligned with the needs of our clients. Instead we work with multiple market participants which are selected after an extensive due diligence where best execution is our top priority as well as financial strength and stability.”

Margin and short interest both higher

“margin lending has increased again. So it’s higher now than it was at the end of the quarter…And two, the market did have a lot more shorting going on in the quarter and those two elements is what drove the revenue.”

Don’t know if there will be regulation around payment for order flow

“Payment for order flow has been around for a long time, it’s been looked at before. So this isn’t the first time this has come up for a discussion. So, we don’t have any particular inside knowledge, but we’re not anticipating because of books been written, but all of a sudden payment for order flow is going away.”

We’re going to look for ways to get paid for our volume though

“in any situation where something changes…Our flow has value, that’s been proven out, and we’re going to look to whatever variety of ways and alternatives are available to us to make sure that we extract some of that value, but after we’ve looked after our best execution responsibilities.”

Our clients don’t care about Michael Lewis’ book

“trading did not change after Michael Lewis’s book. And just to give you some statistics we don’t pay attention to what certain media people say as much and we don’t pay attention to what some our peers say as much. We pay attention to what our clients say. And we have had, I think it’s — let me get them here for you, 70 phone calls and 112 emails on this. So, this is from our perspective not a hot issue with our customers, that’s not to say we don’t take it seriously, but it’s not a hot issue with our customers. And our perspective on this is, this is a Wall Street issue, not a Main Street issue and we’re on Main Street front.”

Toronto Dominion more focused on going after HNW private banking clients, we’re more mass affluent

“they’re more interested in the high end of the wealth business what you would typically call our A-type of market, and more of a private banking type high end that’s part of the market. We are much more on our retail side, a mass — mass affluent type marketing firm obviously we bump into each other a bit, but that’s common of all wealth models.”

Bullish sentiment plus volatility equals the perfect mix

“anytime you have the kind of increasingly bullish sentiment that we’ve had over the last 6 to 9 months, and you have increase in volatility, our trading is going to be strong than it was this past quarter.”

No discussions with anyone at the SEC over market structure

“I can say, I have had no discussions with anyone at the SEC in the last two or three weeks.”

SEC is really good at listening to all sides

“the SEC has always done this in a very thoughtful way, a very fact based way from our perspective, that’s all you can ask for. They weigh every participant’s views which I think they should — we can all also ask for, but it’s not like lobbying the government, the Federal politics. They’re a very different organization with a very different mandate.”

A lot of people on vacation recently

“We just had a mini correction but we have also had a series of vacations, anybody that lives in New York knows that. New York hasn’t been the normal New York the last week or two.”

Tax harvesting also probably drove activity

“But when the market was up 30% last year people had capital gains and a lot of people did harvest them and if they did basically they’re going to have tax liabilities.”

nearly doubled the ad budget five years ago

“when I first came down we were spending about $140 million a year in advertising in my memory, and now we’re spending about $250 million. So we definitely upped it, because we saw the opportunity in the market and we wanted to broaden out our offer and we made the shift from being just a trading shop — equity trading shop to an equity and option trading shop, but also to an asset gatherer.”

Investing in marketing, view technology as a marketing expense

“marketing is a little bit more dynamic and a bit of a call on the market environment that you’re in. There is certain market environments where it works really well and other ones where it doesn’t work so well. We have been — the hard part is predicting those. But if I had to say, where would we invest right now if we wanted to invest, marketing would be on the list. We have always had sales people on the list, but if I had to pick one right now it would be technology because I do think we’re going through a fair bit of change in technology whether it’s mobile, the trend to mobile to social media, data analytics all those types of techniques that which are pervasive in almost any business and so I have seen quite a shift and we’re investing in each of those areas rather significantly. And the question we keep asking ourselves, are we investing enough in those areas. Because we do see it shifting and normally these shifts start, they pick up momentum and then they get stronger. We have been at the front edge of that but just got to make sure you can stay at the front edge and keep up with the volumes as it continues to grow”

Probably at the trailing end of the cycle

“The — oh geez, good question actually. I would say to you that in terms of the cyclical change I think we are at the high-end here or the trailing end of the cycle, unless the economy, if we do come out the economy turn stronger here and I’d say April, May, June or even in the fall and the market starts to — the economy starts to grow faster. I think you’ll see it go again, then we would be — tend to be bullish. But that’s very much a function of the economy and I’m optimistic, but I have been optimistic for a bit and this has been a long tough slog. But I think that where we are in the cycle is largely a function of the economy. And right now I think we paused. We had a good run last year, we’ve had a positive quarter, we’ve been sideways, we had the weather, we’ve had a few events here and there we’ve got events in Russia and Ukraine. So a lot of it is going to depend on the economy and macroeconomic geopolitical events here I think where we go in terms of the cycle.”