Schwab takes aim at forex market

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Schwab takes aim at forex marketSchwab Takes Aim at Forex Market

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis ) - Charles Schwab ( SCHW ) recently announced its decision to acquire optionsXpress ( OXPS ) in a friendly all-stock deal, as the company takes aim at the growing foreign exchange market.

The move adds to Schwab's arsenal as it competes with firms like E-Trade ( ETFC ), Ameritrade ( AMTD ), Fidelity and Bank of America ( BAC ).

Our $19.74 price estimate for Charles Schwab implies a roughly 10% premium to the stock's market price.

The gradual improvement in the global economy since 2008??s downturn has seen the foreign exchange market surpass its size in 2007 in terms of average daily trading volumes. Overall daily forex trading volumes in 2010 were estimated to be nearly $4 trillion, with retail forex volumes making about $313 million, a share of less than 8%.

The size of the opportunity that exists in forex trading for online brokerage firms can be understood by the fact that retail forex volumes are more than 30% larger than the average daily turnover for equity markets.

Forex Capital Markets ( FXCM ) is an established online forex trading firm that has an advantage over online brokerage firms when it comes to forex trading. Ameritrade was the first among the big online brokerage firms to provide forex trading, with the acquisition of thinkorswim in 2009. Currency and futures trading contributes to about 6% of Ameritrade's total trading volume.

Online brokerages primarily compete on factors like commissions and fees, types of investment products offered, research and advice for investors, and customer service. With retail investors looking for a one-stop-shop for all their financial transactions, and with forex trading becoming increasingly popular, Schwab cannot afford to be left out.

Assuming that Schwab adds forex trading to its portfolio of offerings, and this results in an almost 6% growth in the number of trades (as demonstrated by Ameritrade), we can estimate a 6% increase in the average number of trades per brokerage account.

Our base case estimates project 8.8 trades per brokerage account (on average) in 2011. Given the potential 6% increase, this number could grow to 9.3 trades per brokerage account.

While this scenario would provide a slight increase to our $19.74 price estimate for Charles Schwab, the real benefit to the company would come from its ability to maintain existing customers that are interested in forex trading platforms.