U.S. discount brokers' profits hit by trading slump, rates By John McCrank NEW YORK (Reuters) - Earnings at U.S. discount brokerages are expected to suffer in the latest quarter due to lackluster trading levels and ultra-low interest rates, putting the focus yet again on cost cuts to bolster future profitability. Charles Schwab Corp (SCHW.N) reports third-quarter results on Monday, followed by E*Trade Financial Corp (ETFC.O) on Thursday. TD Ameritrade Holding Corp (AMTD.N) releases its fiscal fourth-quarter report on October 30. Equity trading levels hit multiyear lows in July and August as the European debt crisis and the tepid U.S. economy kept many Main Street investors on the sidelines during what are already traditionally slow months. Gains in equity markets seem to have helped reengage investors in September. Daily average revenue trades (DARTs) - a key trading metric at brokerage firms - rose an estimated 22 percent from August, though the uptick could be fleeting, said UBS analyst Alex Kramm. "Despite the September acceleration, we believe investors remain cautious," he said in a note to clients, adding that UBS prefers Schwab's stock over TD Ameritrade's, due to its lower reliance on trading volumes to drive revenues. Overall DARTs for the quarter at the three firms were likely down 20 percent on average on a year-over-year basis, said Richard Repetto, an analyst at Sandler O'Neill + Partners. The brokers were dealt another blow in September when the U.S. Federal Reserve pledged to keep interest rates at rock-bottom levels until at least mid-2015. That means revenue tied to interest rates, a key source of income for these firms, will remain under pressure for years. Clients of discount brokerages keep a hefty amount of cash in their accounts - averaging about 25 percent at Schwab - that the firms traditionally invest in high-yielding securities while giving low money-market-rate returns to investors. With rates in a long, deep swoon, however, the brokers are suffering a double whammy of weak investment returns and lost fees on the money-market funds they offer to investors. Schwab has waived over $1 billion in fees on money market funds in the past few years out of concern that its investors would have negative returns if a fee were charged. Schwab waived $146 million in fees in the second quarter, up from $128 million a year earlier. Fee waivers for the third quarter will likely total $145 million, said JPM Securities analyst David Trone. Like other brokerage firms, the discounters also are booking much lower revenue than normal from margin loans and other interest-sensitive products. Added together, the discount brokers are essentially treading water when it comes to profit growth. The fact that they have been steadily adding new accounts and client assets by stealing market share from full-service firms has been muted by lower rates and trading volumes. Analysts expect San Francisco-based Schwab, which gets around 20 percent of its revenues from trading, to have earned 17 cents a share on revenue of $1.20 billion, according to Thomson Reuters I/B/E/S. In the year-ago period, it earned 18 cents a share on revenue of $1.18 billion. To help cut costs, Schwab closed the European arm of its options trading unit this month. And rival TD Ameritrade stopped accepting new accounts in Italy, Belgium, and other countries. TD Ameritrade is the No. 1 U.S. discount broker by trading volume, deriving more than 40 percent of its annual revenue from trading fees and commissions. Wall Street estimates the Omaha, Nebraska-based firm earned 25 cents a share on revenue of $645 million, versus earnings of 29 cents a share on revenue of $703.5 million a year earlier. The focus for TD Ameritrade will be on its guidance for its fiscal year 2013, which began this month. TD Ameritrade may also raise its dividend, "which could compensate investors for another year of lackluster earnings growth," said Kramm. He added that TD Ameritrade would likely discuss further expense controls and new initiatives to spur growth. E*Trade, which makes a little less than 30 percent of revenues from trading, is expected to report earnings of 8 cents a share, not including unusual items, on revenue of $440.5 million. The New York-based firm earned 16 cents a share on revenue of $507.3 million a year earlier. E*Trade replaced its chief executive during the quarter with an interim leader and may provide details on its CEO search. It will also likely flesh out its plans to reduce its balance sheet by $5 billion to $10 billion and reduce expenses by $40 million by the end of next year. It announced the plans last quarter but gave few details. Reporting By John McCrank with additional reporting by Jed Horowitz; Editing by Jennifer Merritt and Kenneth Barry