Discount brokerage E*Trade Financial reported a quarterly loss because of an impairment charge of $142 million to account for its surprise exit from market making.
The dismantling of the market-making unit, which executes trades in many of the stock orders placed by E*Trade customers and those of smaller brokerage firms, is a final capitulation to the firm's former largest investor, Citadel.
E*Trade shares were up nearly 5 percent in after-hours trading. The shares closed at $13.62 in regular trading Wednesday.
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Citadel and its founder Kenneth Griffin plowed more than $2.6 billion into E*Trade to help rescue the troubled discount broker and bank between 2007 and March of this year, when the hedge fund sold its entire 9.6 percent stake at a profit of more than $800 million, according to well-placed sources.
E*Trade agreed last year to improve its order-handling procedures after Griffin, whose firm competes with E*Trade to execute trades, had criticized its order execution processes as inefficient.
"Our decision to exit the market-making business underscores management's intensifying focus on our core customer franchise and the desire to concentrate our efforts on areas that directly support the core of the company," E*Trade Chief Executive Paul Idzik said in a statement on Wednesday.
E*Trade reported a net loss of $54.4 million, or 19 cents per share, for the second quarter, compared with a profit $39.5 million, or 14 cents per share, a year earlier. Revenue fell about 3 percent to $439.9 million.
Excluding the impairment charge, E*Trade reported a net profit of 21 cents per share. Analysts on an average expected earnings of 12 cents per share on that basis on revenue of $419.8 million, according to Thomson Reuters I/B/E/S.
The company added a net 30,000 brokerage accounts during the quarter along with $220 billion in new customer assets.
E*Trade's loan-loss provision fell to $46.1 million during the quarter from $67.3 million a year earlier, a sign of a contraction in its bad-loan portfolio.
E*Trade, which has been dragged down by its core retail brokerage business due to sliding revenue, appointed Navtej Nandra as the head of the division in April in an effort to revive its fortunes.
The company suffered hundreds of millions of dollars of losses from making subprime mortgage loans during the financial crisis that began in late 2007.
Rival Charles Schwab reported a slide in its second-quarter profit last week because of higher expenses, which outstripped higher-than-expected revenue.
E*Trade's tier one leverage ratio, a key measure of its capital strength that is being closely watched by investors, rose to 9.5 percent of assets from 7.9 percent a year earlier.
The company said it expects to ask regulators to let its bank move excess cash to its holding company when the ratio reaches 9.5 percent, giving the brokerage cash for growth and allowing for a potential distribution to investors through dividends or share buybacks.