Daily Average Revenue Trades (DARTs): Definition, Formula, Example, and FAQs
Daily average revenue trades (DARTs) represent a crucial financial metric within the brokerage industry, specifically falling under the broader category of brokerage metrics. It quantifies the average number of trades executed per day from which a brokerage firm generates revenue, primarily through commission fees or other transaction-based charges. DARTs serve as a key indicator of client engagement and trading activity, reflecting the operational volume that directly contributes to a firm's top-line earnings. While the term "trade" might imply a single transaction, DARTs often count both the buy and sell sides of a round-trip transaction or any transaction that incurs a fee, giving a snapshot of how frequently a brokerage's clients are actively trading. This metric is particularly significant for firms catering to active traders and retail investors engaging in online trading.
History and Origin
The concept of tracking revenue-generating trades gained prominence with the evolution of the modern brokerage industry, particularly after significant regulatory shifts and technological advancements. Historically, brokers charged substantial, fixed commission fees for each transaction. This changed dramatically on May 1, 1975, a day referred to as "May Day," when the U.S. Securities and Exchange Commission (SEC) abolished these fixed commission rates, allowing for competitive pricing.15 This deregulation ushered in the era of discount brokerage and paved the way for the eventual explosion of online trading platforms in the 1990s. As trading became more accessible and less expensive, the sheer volume of trades grew, making DARTs an increasingly relevant measure for brokerage firms to assess their core business activity and financial performance. The rise of internet-based trading further amplified the importance of DARTs as a direct reflection of heightened individual investor participation in the equity markets.14
Key Takeaways
- Daily average revenue trades (DARTs) measure the average number of trades per day that generate revenue for a brokerage firm.
- It is a vital brokerage metric reflecting client engagement and activity levels.
- DARTs are influenced by factors like market volatility, commission structures, and the popularity of online trading platforms.
- A higher DARTs figure generally indicates more revenue-generating client activity for the brokerage.
- Despite the shift to zero-commission trading for many asset classes, DARTs remain relevant for tracking non-commission-based revenue generation and overall client engagement.
Formula and Calculation
The calculation for Daily Average Revenue Trades (DARTs) is straightforward:
Where:
- Total Revenue-Generating Trades in a Period: This refers to the sum of all client trades within a specific reporting period (e.g., a quarter or a month) for which the brokerage firm earned revenue, whether through commission fees, payment for order flow, or other transaction-based charges.
- Number of Trading Days in that Period: This is the count of business days within the specified reporting period when financial markets were open for trading.
This formula provides an average, smoothing out daily fluctuations to give a consistent measure of trading activity.
Interpreting Daily Average Revenue Trades
Interpreting Daily Average Revenue Trades involves understanding what the number signifies for a brokerage firm and the broader financial landscape. A high DARTs figure suggests robust client engagement and active participation in the capital markets. For a brokerage, consistently strong DARTs can point to healthy revenue streams, even in a zero-commission environment, as firms generate income through alternative means such as payment for order flow or interest on margin balances.13 Conversely, a declining DARTs trend might signal reduced client activity, potentially due to lower market volatility, shifting investment strategies, or increased competition. Analysts often examine DARTs in conjunction with other metrics, such as assets under management and net new accounts, to gain a comprehensive view of a brokerage's growth and profitability. The metric is a direct reflection of how often clients are using the trading platform for revenue-generating activities.
Hypothetical Example
Consider "DiversiTrade," a hypothetical online trading platform. In the first quarter of the year, spanning 63 trading days, DiversiTrade recorded a total of 15,750,000 revenue-generating trades. These trades include stock and options transactions for which the firm earned a small per-share fee or received payment for order flow.
To calculate DiversiTrade's DARTs for the first quarter:
This means that, on average, DiversiTrade processed 250,000 revenue-generating trades each day during the first quarter. This figure provides insight into the platform's user activity and the efficiency of its underlying trading infrastructure, which supports millions of daily client interactions within the equity markets.
Practical Applications
Daily average revenue trades (DARTs) are a critical metric used across various facets of the financial industry. For brokerage firms themselves, DARTs are a primary indicator of operational volume and client engagement, directly influencing revenue projections and staffing needs for trading support and technology. Investor relations departments at public brokerages frequently highlight DARTs in their earnings reports and investor presentations to demonstrate client activity and business health. For instance, major firms like Charles Schwab and TD Ameritrade regularly report their DARTs figures as part of their monthly and quarterly performance updates.11, 12
Beyond internal use, DARTs are vital for financial analysts assessing the health and growth prospects of brokerage companies. A high DARTs number, especially when accompanied by growth in client assets, can signal a strong competitive position. Regulators, such as the SEC, also monitor trading activity, indirectly utilizing data points like DARTs to understand market trends and the impact of policy changes. For example, the shift to zero-commission trading significantly altered brokerage revenue models, making DARTs a measure of transaction volume that still generates revenue through alternative means, such as payment for order flow.9, 10 This ongoing evolution necessitates careful analysis of DARTs in the context of a firm's diversified revenue streams.8
Limitations and Criticisms
While Daily Average Revenue Trades (DARTs) provide a useful snapshot of client engagement and revenue-generating activity for brokerage firms, the metric has limitations. One significant criticism is that DARTs do not inherently convey the profitability of each trade, especially in the era of zero commission fees. Firms now earn revenue from sources like payment for order flow, interest on margin accounts, and other fees, meaning a high DARTs count doesn't automatically translate to high profit margins per trade.7
Another limitation is that DARTs can be heavily influenced by external factors like extreme market volatility or significant news events, leading to temporary spikes that may not reflect sustainable underlying client behavior.6 For instance, periods of market stress often see a surge in DARTs as investors react quickly.5 Furthermore, an increase in DARTs might not always indicate sophisticated investment strategies; some research suggests that the increased accessibility of online trading may have also led to an increase in "naive" or less informed investors engaging in more frequent trading, which can sometimes lead to underperformance.3, 4 Therefore, while DARTs illustrate activity, they don't fully capture the quality or outcome of that activity for the investor.
Daily Average Revenue Trades vs. Trading Volume
Daily Average Revenue Trades (DARTs) and Trading Volume are both measures of market activity, but they refer to distinct aspects.
Daily Average Revenue Trades (DARTs) focuses specifically on the average number of trades executed per day that generate revenue for a brokerage firm. This revenue can come from commissions (where still charged), payment for order flow, or other transaction-based fees. It is a metric primarily used by brokerage firms and analysts to gauge the activity that directly contributes to a firm's earnings.
Trading Volume, on the other hand, represents the total number of shares or contracts traded for a particular security or across an entire market during a specific period, regardless of whether a commission or fee was paid for each individual transaction. Trading volume is a broader market-level indicator, often used by investors and analysts to assess market liquidity, the strength of price movements, and overall market interest in a security or asset class. It does not directly account for the revenue generated by the brokers facilitating those trades.
The key distinction lies in the "revenue-generating" aspect of DARTs. While a high trading volume might occur, if many of those trades are commission-free and don't contribute to other revenue streams for a broker, they wouldn't be counted in DARTs. DARTs are a brokerage-specific financial metric, whereas trading volume is a market-wide or security-specific metric.
FAQs
What types of trades are included in DARTs?
DARTs typically include all client trades that generate revenue for a brokerage firm. This encompasses transactions where clients pay a commission fee (if applicable), or where the firm receives compensation through arrangements like payment for order flow or other transaction-based fees. This can include trades in stocks, options, and sometimes mutual funds or other asset classes if they incur a revenue event for the broker.
How do "zero-commission" trades affect DARTs?
Even with "zero-commission" trades, DARTs remain a relevant metric. While clients don't pay a direct commission, brokerage firms often generate revenue through other means, such as receiving payment for order flow from market makers or earning interest on client cash balances and margin accounts. Therefore, these "commission-free" trades still count towards DARTs if they contribute to the brokerage's revenue.
Why is DARTs an important metric for brokerage firms?
DARTs are important because they provide a direct measure of client trading engagement that translates into revenue for the firm. They indicate how frequently clients are utilizing the brokerage's platform for revenue-generating activities. This helps brokerage firms and investors assess the operational activity, efficiency, and overall financial performance of the business.
Is DARTs a measure of profitability?
No, DARTs is a measure of activity, not direct profitability. While higher DARTs generally suggest more potential revenue opportunities for a brokerage, they do not account for the costs associated with facilitating those trades or the specific profit margins derived from each type of revenue stream. Profitability depends on managing expenses and the various income sources beyond just the number of trades.
Does FINRA use DARTs in its regulations?
While FINRA (Financial Industry Regulatory Authority) does not directly use the term "DARTs" in its regulations, it defines and monitors "day trades" as part of its "pattern day trader" rules.1, 2 These rules require individuals classified as pattern day traders to maintain a minimum equity of $25,000 in their margin accounts to engage in frequent trading. The activity measured by DARTs is closely related to the types of frequent trading behaviors that FINRA monitors for regulatory purposes.