TD AMERITRADE HOLDING CORP. 
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NEW YORK (Reuters) - TD Ameritrade Holding Corp (>> TD Ameritrade Holding Corp.), the biggest U.S. discount broker, said profit in its fiscal second quarter jumped 34.7 percent to $194 million on record revenue driven by net new client assets of $12.2 billion and heavy trading.
The profit translates to 35 cents a share, also up 35 percent from the year-earlier quarter and consistent with the forecast of analysts tracked by Thomson Reuters I/B/E/S.
On a conference call with analysts, Chief Financial Officer William Gerber said the firm expects earnings per share for the firm's fiscal year, which ends on September 30, to hit or beat the high end of its earlier projections of $1.20 to $1.40. In the first six months, TD Ameritrade has generated earnings of 70 cents a share, up from 53 cents in the comparable 2013 period.
Fred Tomczyk, the company's chief executive, criticized what he called a knee-jerk reaction to Michael Lewis's new book "Flash Boys," which says markets are rigged in favor of super-automated, high-frequency trading firms.
TD Ameritrade and other discount brokerage firms sell most of their customer trades to selected market-makers for execution, leading to concerns from investors that Lewis's book may spur regulators to curtail the lucrative "payment for order flow" practice.
TD Ameritrade and other discounters' stocks fell by more than 10 percent after Lewis's book was published on April 7, though they have recovered.
Tomczyk said the firm will never sacrifice its duty to seek the best execution for clients even as it seeks to extract profit for shareholders from the flood of client orders that professional traders use to guide their own trading and that exchanges want to ensure liquidity.
"We're not anticipating because a book's been written that payment for order flow is going away," Tomczyk said. TD Ameritrade customers appear unconcerned about the book, he said, noting that the firm received only 70 phone calls and 112 emails asking questions about the book and payment for order flow. The firm ended the quarter with 6.15 million funded accounts, up from 5.88 million one year earlier.
The Omaha, Nebraska-based company said average client trades per day, fee-based investment balances and total client assets all hit record levels during the quarter that ended on March 31.
Retail investors are getting "increasingly bullish" about stocks, Tomczyk said, and in the first three months of the year made an average of 492,000 trades a day at TD Ameritrade, up 30 percent over last year. The trading also elevated customers' highly lucrative margin borrowing, while cash balances fell to 14.8 percent of their accounts from a more typical range of 15-20 percent.
The margin lending led to a higher-than expected net interest margin of 1.52 percent, Christopher Harris, an analyst at Wells Fargo Securities wrote in a note to clients. Pretax profit margin, a measure of how much revenue falls to the bottom line before tax, rose for the entire firm to 39 percent from 34 percent one year earlier.
The margin was down slightly from the last three months of 2013, in part because advertising expenses rose 24 percent to $94 million due to TD Ameritrade's sponsorship of the Winter Olympics. Gerber said expenses should return to more normal levels the rest of the year.
Trading activity this month has fallen slightly but should remain high because customers are returning in droves to buy stocks, he and Tomczyk said. Many of TD Ameritrade's customers become more active when markets are volatile, and the S&P 500 index rose or fell 1 percent or more on 25 days during the quarter versus just 12 days in the same period of 2013.
TD Ameritrade expects volatility to continue this year due to the Federal Reserve's tapering policy of reducing its bond volume and other fiscal policies, Gerber said.
Clients also are making many more of their trades through cellphones and other mobile devices. Mobile orders averaged 13 percent of the firm's daily total, up about 50 percent from last
year.
Tomczyk also said that the broad U.S. economy continues to slowly recover, a trend that encourages more retail investors to trade.
TD Bank Group, the parent of Toronto-Dominion Bank (>> Toronto-Dominion Bank) that is the brokerage firm's largest shareholder, said TD Ameritrade's results should contribute about C$78 million to its yet-to-be reported second-quarter net income.
Shares of TD Ameritrade, which have jumped 75 percent over the past 12 months, including reinvested dividends, were down 2.0 percent to $32.10 in morning trading on the New York Stock Exchange.
Tomczyk said during the call that the company expects to continue using surplus cash to raise dividends but has no immediate plans for stock buybacks, a sign that the company may think its shares are fully valued.
(Reporting By Jed Horowitz; editing by Clive McKeef)
By Jed Horowitz
