What Is DARTs?
Daily Average Revenue Trades (DARTs) is a key financial metrics used within the brokerage industry to measure the average number of trades executed per day from which a firm generates revenue. This metric helps analysts and investors assess the level of client trading activity and a brokerage firm's potential profitability. Traditionally, DARTs represented trades that generated direct commissions or fees. However, with the widespread adoption of zero-commission trading, the definition of DARTs has evolved for many firms to include trades that generate revenue through other means, such as payment for order flow (PFOF). Understanding DARTs is crucial for evaluating the performance and business model of brokerages in today's dynamic market environment.
History and Origin
The concept of Daily Average Revenue Trades (DARTs) emerged as a vital metric when commissions on trades were a primary source of income for brokerage firms. In this traditional model, a higher number of DARTs directly correlated with increased revenue. For decades, particularly for discount brokerages, the volume of daily trades that generated a fee was a clear indicator of financial health.
A significant shift in the brokerage business model began around 2014 with the advent of commission-free trading platforms, which gained widespread adoption by late 2019. This change drastically impacted how brokerages generated revenue, prompting many to redefine DARTs.13 Instead of direct commissions, firms increasingly relied on revenue streams like payment for order flow, where market makers compensate brokerages for directing client orders to them. The Securities and Exchange Commission (SEC) has long regulated payment for order flow, with rules like SEC Rule 11Ac1-3, adopted in 1998, requiring disclosures around these practices.12 The shift to commission-free trading, particularly the surge in retail investors during 2020, further highlighted the evolving importance of DARTs, even as its underlying revenue drivers changed.11
Key Takeaways
- DARTs measure the average daily number of revenue-generating trades at a brokerage firm.
- The definition of DARTs has evolved from purely commission-based trades to often include those generating revenue through payment for order flow.
- Analysts use DARTs as a financial metrics to assess a brokerage's trading activity and potential quarterly earnings.
- An increasing DARTs value generally suggests higher revenue potential, while a declining value may indicate reduced earnings.10
- Different brokerages may have varied definitions of DARTs, requiring careful consideration when comparing firms.
Formula and Calculation
The basic formula for calculating Daily Average Revenue Trades (DARTs) is straightforward:
Where:
- Total Revenue Trades in Period refers to the aggregated count of all customer trades during a specific reporting period (e.g., a quarter or month) that generate revenue for the brokerage, whether through commissions, fees, or payment for order flow.
- Total Trading Days in Period refers to the number of days within that same period when major financial markets (like the NYSE and Nasdaq) are open for trading.9
For example, if a brokerage records 50,000 revenue trades over a month with 20 trading days, its DARTs would be 2,500.
Interpreting the DARTs
DARTs serve as a crucial financial metrics for understanding the operational performance of brokerage firms. An increasing DARTs number typically signals robust client trading activity, which can translate into higher potential revenue for the brokerage.8 This makes DARTs a valuable indicator for analysts attempting to forecast a firm's quarterly earnings.
However, interpreting DARTs requires context, especially in the era of commission-free trading. A surge in DARTs might not necessarily mean a proportional increase in direct commission revenue if a significant portion of those trades are commission-free and generate revenue through alternative mechanisms like payment for order flow. Therefore, analysts often look at DARTs in conjunction with other metrics, such as revenue per DART or the percentage of revenue derived from PFOF, to gain a more complete picture of a brokerage's financial health.
Hypothetical Example
Consider "Alpha Brokerage Inc.", a rapidly growing online trading platform. In Q1, Alpha Brokerage reported 25,000,000 revenue-generating trades over 63 trading days.
To calculate their DARTs for Q1:
This means Alpha Brokerage Inc. averaged approximately 396,825 revenue-generating trades per day during Q1. This high DARTs figure would be attractive to investors and analysts, suggesting strong client engagement and a healthy underlying business model, particularly if the brokerage's revenue per DART remains stable or grows.
Practical Applications
DARTs are a critical financial metrics with several practical applications across the financial industry:
- Brokerage Performance Evaluation: DARTs are a primary gauge of a brokerage firm's operational activity. Higher DARTs generally indicate a more active client base, which in turn can lead to increased revenue and profitability.7 This makes it a key performance indicator (KPI) for assessing management effectiveness and competitive positioning within the brokerage industry.
- Earnings Forecasting: Financial analysts closely monitor DARTs when predicting a brokerage's quarterly earnings. A consistent increase in DARTs often precedes positive earnings surprises, while a decline can signal a downturn.6
- Market Share Analysis: By comparing DARTs across different brokerage firms, investors can assess relative market share in terms of client trading activity. This is particularly relevant in the competitive landscape of online trading platforms.
- Impact of Commission-Free Trading: In the wake of commission-free trading, DARTs have become instrumental in understanding the shift in brokerage revenue models. Many firms now generate revenue through payment for order flow, a practice that has significantly influenced the evolution of broker-dealer business models.5 The dramatic increase in retail investors and their trading volume, particularly since 2020, has further underscored the importance of DARTs as a measure of engagement even when direct commissions are absent.4
Limitations and Criticisms
While DARTs are a widely used metric, they come with certain limitations and have faced criticisms, particularly in the modern financial landscape.
One significant challenge is the changing definition of a "revenue trade" due to the prevalence of zero-commission trading. Historically, DARTs clearly indicated trades that generated direct commissions or fees. However, many brokerages now include commission-free trades that generate revenue through mechanisms like payment for order flow (PFOF). This variability means that comparing DARTs across different firms without understanding their specific definitions can be misleading. A firm reporting high DARTs might be generating less revenue per trade if a large portion comes from lower-margin PFOF, compared to a firm still primarily relying on traditional commissions.
Furthermore, the focus on trade volume, as measured by DARTs, does not inherently convey the quality of execution quality for retail investors. Concerns have been raised that PFOF arrangements, which bolster DARTs in a commission-free environment, could create a conflict of interest where brokers might route orders to venues that offer the highest payment rather than necessarily the best price for the client. This potential conflict has led to SEC scrutiny of payment for order flow, prompting discussions around enhanced disclosure and market structure reforms.3 Thus, while high DARTs signify active trading, they do not guarantee optimal outcomes for individual traders.
DARTs vs. Payment for Order Flow
While often discussed in tandem, Daily Average Revenue Trades (DARTs) and payment for order flow (PFOF) are distinct concepts within the brokerage industry.
DARTs are a metric that quantifies the average daily number of trades from which a brokerage firm derives revenue, regardless of the source. It is an indicator of client trading activity and overall engagement. PFOF, on the other hand, is a revenue mechanism or compensation model where market makers pay brokerage firms for directing customer orders to them for execution. The market maker profits from the bid-ask spread and shares a portion of that profit with the broker.
The confusion often arises because, in the era of zero commissions, PFOF has become a significant, if not primary, component of the revenue streams that contribute to a brokerage's DARTs. While DARTs measure how many revenue-generating trades occur, PFOF explains how some of those trades generate revenue without direct client commissions. Therefore, PFOF is a component that influences DARTs in the modern brokerage landscape, rather than being an alternative metric to it.
FAQs
What does it mean if a brokerage's DARTs are increasing?
An increasing DARTs figure generally indicates that a brokerage firm's customers are engaging in more trading activity on a daily basis. This can lead to higher potential revenue for the brokerage, especially if it's accompanied by stable or growing revenue per trade.2
Are DARTs only relevant for brokerages that charge commissions?
No, DARTs are relevant even for brokerages offering zero-commission trades. In such cases, the definition of DARTs expands to include trades that generate revenue through other means, such as payment for order flow. The metric still serves to measure client engagement and the volume of revenue-contributing trades.
How does the rise of commission-free trading affect DARTs?
The rise of commission-free trading has significantly changed the interpretation of DARTs. While the volume of trades (DARTs) may increase as trading becomes "free" for retail investors, the revenue per DART may decrease compared to traditional commission models. Brokerages have had to adapt their business models, increasingly relying on alternative revenue streams to maintain profitability.1
Why do analysts care about DARTs?
Analysts care about DARTs because they provide insight into a brokerage firm's operational momentum and potential for quarterly earnings. It's a key operating metric that, when combined with information on revenue streams, helps them forecast financial performance and compare companies within the brokerage industry.