(Bloomberg) -- TD Ameritrade Holding Corp.’s better-than-expected quarterly results were lifted by the company’s stock loan business, according to Chief Executive Officer Tim Hockey.
Investor skepticism toward Beyond Meat (NASDAQ:BYND) Inc., cannabis stocks and a “relatively small number” of other companies created a scarcity of shares to short, boosting fees, Hockey said in a telephone interview. That’s something he can’t forecast for in the future, he added. TD Ameritrade shares rose as much as 3% on Tuesday to the highest intraday since Sept. 30.
According to S3 Partners, Beyond Meat (NASDAQ:BYND) continues to “lap the field” as the most expensive actively shorted stock. Tilray Inc. was third on S3’s weekly list of U.S. traded stocks with the most expensive stock borrow fees; Aurora Cannabis Inc. was number eight and Canopy Growth Corp. was in the top 20.
Earlier this month, Beyond Meat (NASDAQ:BYND) and cannabis short-selling had been seen by Sandler O’Neill analyst Richard Repetto as helping e-brokers. Repetto had noted Charles Schwab (NYSE:SCHW) Corp. and Interactive Brokers Group had reported a more than 60% sequential increase in securities lending revenue in the third quarter, which augured well for peers E*Trade Financial Corp. and TD Ameritrade.
On Tuesday, Repetto wrote that Omaha, Nebraska-based TD Ameritrade’s earnings beat was mostly due to its stock loan business. Repetto added that revenue across all lines were above Sandler’s expectations.
TD Ameritrade’s earnings-per-share was driven by “revenues in lower-quality buckets,” including Treasury gains, outsized securities lending and higher order flow, but “this quarter is all about the 2020 guidance,” Wolfe’s Steven Chubak wrote in a note. The 2020 update was “better than anticipated on both revenue and expense,” Chubak said, adding that it struck him as a “bit aggressive.”
“TD Ameritrade’s initial fiscal 2020 guidance may calm some nerves,” Bloomberg Intelligence’s David Ritter wrote, “but long-term effects of zero-trading fees will take time to play out.” Ritter said that “some brokers, perhaps including Ameritrade, will lose market share despite assertions to the contrary.”
Regarding going to zero commission, Hockey said, he was “quite excited,” even though it was “painful” to take a “one-time haircut.” He’d long been anticipating the drop, but “the day came faster than we thought.”
TD Ameritrade shares plunged 26% to $34.67 on Oct. 1, as Schwab said it would cut commissions on trades for stocks and exchange-traded funds to zero, followed on the same day by TD Ameritrade, and then ETrade the day after. Other firms announcing free trading options in recent weeks include Bank of America Corp (NYSE:BAC)., Raymond James Financial Inc. and Fidelity Investments, and there’s a test at Square Inc (NYSE:SQ).
“The market is trying to figure out an earnings growth rate going forward,” Hockey said. Last year TD Ameritrade had about $6 billion in revenue; moving to zero commission means about $920 million will go away on an annual basis, he said. The company will still make about $5.1 billion, with “very healthy margins” of about 40%, instead of 50%, he added.
Hockey expects the online brokers will take even more share from traditional brokers. And the “value proposition” at companies which had been competing on the basis of price -- like Robinhood -- “went to zero,” he added.
There’s another topic Hockey gets frequent questions on: M&A. Asked about a possible deal, including speculation TD Bank may be interested, he gave the company’s “standard answer” that’s it’s their job to look at ways to increase value.
Regarding geopolitics, Hockey noted that trade is the only issue that’s been triggering market volatility. “If there’s a hint of a deal, markets react,” he said in regard to U.S. and China. On the other hand, things that used to boost volatility, like shifts in the Middle East and “presidential tweets,” have been having a “more muted effect,” he said.
Hockey has told the board he’ll step down by the end of February; he would transition to an advisory role sooner, he said, “depending on how the search” for a new CEO goes.