TD Ameritrade is exploring ways to tap into the red-hot world of sports gambling after it slashed stock trading commissions to zero

Jay Biggerstaff-USA TODAY Sports

TD Ameritrade has already conducted tests with focus groups around valuing and trading well-known players like NFL superstar Patrick Mahomes.

• TD Ameritrade is considering business opportunities it could pursue within the world of sports gambling as it looks to make up lost revenue from moving to zero commissions.
• Vijay Sankaran, the chief information officer of the $1.3 trillion brokerage, told Business Insider that TD Ameritrade has already conducted experiments with focus groups that have indicated it "may be a space we can play in."
• The firm's chief financial officer, Steve Boyle, said last month in a statement that he expects the firm's recent move to eliminate commissions to result in a revenue impact of around $220 million to $240 million per quarter, or about 15% to 16% of net revenue.
• At least one competitor has made inroads in the space. In July, Interactive Brokers launched a simulated sports betting exchange.
• Visit BI Prime for more stories.

An online brokerage hoping to make up for revenue lost from its recent move to no-commission trades believes the end zone, not Wall Street, could be a smart bet for new business.

TD Ameritrade is thinking about how it could leverage its experience in retail trading into business opportunities in the world of sports gambling, chief information officer Vijay Sankaran told Business Insider in an interview at the firm's New Jersey offices.

"We do feel like there are interesting analogs in applying market constructs to fantasy sports-type things," he said.

The exploration is in its early phases, with no products in the works. Still, the Omaha-based firm overseeing some $1.3 trillion in assets across 12 million client accounts is actively working to better understand things like fantasy sports, with the possibility of making an entrance.

Sankaran said TD Ameritrade has already conducted experiments with focus groups, testing the appetite around customers valuing well-known players - like Kansas City quarterback and reigning NFL MVP Patrick Mahomes - and trading them among each other.

The group was "very engaged," Sankaran said, motivating the brokerage to look deeper into where it could fit into what analysts expect will grow to be a multi-billion dollar market.

"It gives us some data to say, 'Hey, this may be a space that we can play in,'" he said of the focus groups. "Next we'll run larger-scale experiments to see if there's enough of a target addressable population."

TD Ameritrade has dabbled in this space before. It provided ESPN fantasy players earlier this year with a digital tool to better assess their teams' performances.

Filling a void left by zero commissions

The thinking Sankaran describes signals the firm's need to survey other businesses as its move to drop online-trading commissions eats into revenue.

The firm's chief financial officer, Steve Boyle, said last month in a statement that he expects eliminating commissions to result in a revenue impact of around $220 million to $240 million per quarter, or about 15% to 16% of net revenue.

TD Ameritrade followed similar rapid-fire announcements last month from rivals Charles Schwab and Interactive Brokers - giving way to similar moves across E-Trade and Bank of America's self-directed investing tool.

Fees for stock-trading, wealth management, and advice have fallen across financial services in recent years as digital entrants and traditional firms have made for a crowded, competitive marketplace in recent years.

"Ameritrade has a number of ideas around ways to mitigate some of the initial impact of lower trading commissions," Devin Ryan, an analyst with JMP Securities, wrote in a note to clients late Tuesday after attending dinner with company management.

Executives clearly said the company was actively considering ways to "pick up incremental revenue, potentially charging for certain services that it was giving away for free previously," or finding new revenue streams, Ryan added.

To be sure, trading commissions only represented a portion of discount brokerages revenue. Payment for order flow from high-speed trading firms, as well as margin spreads on cash accounts, and payments from asset managers for "shelf space" are all ways firms make money. However many of those are under attack as well.

Margin spreads have come under pressure after Fed rate cuts. Meanwhile, an SEC official recently reminded brokerages that they had a responsibility for best execution when it comes to where they send trades, in response to potential concerns of an increase in payment for order flow.

Sports gambling represents untapped ground for many

Sports gambling has taken off in recent years following the US Supreme Court's decision to lift the federal ban on it in May 2018. Individual states have been quick to act, with 42 either completely legalizing sports betting or actively working to do so.

Sankaran was clear that TD Ameritrade has no immediate plans to move into bookmaking - or the act of brokering bets between users - as the state-by-state approvals make it too difficult to navigate at this time.

However, sports books aren't the only businesses set to prosper from the legalization of sports gambling. A wide range of companies have moved swiftly to try and cash in on what, according to one consultant, could grow to be a market valued at roughly $19 billion annually.

Sports-rights owners are one group positioned to benefit, as experts expect sports betting to increase how much media networks will need to fork over to televise games in the coming years.

Media companies are also aiming to attract gamblers, which in turn could bring on new advertisers.

TD Ameritrade isn't the only brokerage that views sports gambling as a potential growth opportunity. Interactive Brokers announced in July the launch of a simulated sports betting exchange.

"We expect this promotion to attract customers who may be new to the Interactive Brokers platform, and who are more familiar with spectator sports than they are with the financial markets," said Thomas Peterffy, chairman of Interactive Brokers, in a statement announcing the news.

Sankaran said the fact a competitor like Interactive Brokers has made a push into the world of simulated sports gambling strengthens the brokerage's theory it would be an area worth pursuing.

"Clearly they've validated that there's some potential interest in that space," he said.

Ashley Rodriguez contributed to this story.