A Company That Thrives on Market Volatility
By Katie Benner

(FORTUNE Magazine) – If you believe that market volatility is here to stay, why not make some money on it? Violent swings tend to scare off retail investors, but they're catnip for institutions, hedge funds, and day traders. And they're a boon to TradeStation Group (TRAD, $12), an online brokerage that caters to hyperactive investors. TradeStation's proprietary platform lets users devise stock and options strategies and back-test their ideas against 20 years of data. It can also automatically place buy and sell orders within fractions of a second of a market move. The company plans to launch a similar platform for currency trading sometime this year.

While TradeStation has only about 30,000 users (vs. Schwab's estimated seven million), they are a busy bunch, making an average of more than 500 trades a year, vs. 40 at the other big online options brokerage, optionsXpress, and ten at Schwab. All that activity helped boost TradeStation's earnings by 30% and revenue by 32% in 2006.

Despite the good numbers, the stock is near its 52-week low. That's in part because commission-free-trading offers are pressuring the online brokers. But Tripti Prasad, an analyst with Sidoti & Co., says TradeStation should weather the price wars, since "its users are there because of the software." Another concern: Co-founders and CEOs Bill and Ralph Cruz stepped down in February after 25 years at the company. But they are still co-chairmen and the biggest shareholders, and analysts say that new CEO Salomon Sredni has been running the company for a long time in his old position as COO. The stock is trading at 13 times estimated 2008 earnings, on par with optionsXpress and cheaper than Schwab at 17 times earnings. If more market madness is ahead, TradeStation could be one way to benefit from investors' mood swings.