Trading among the millions of customers who use discount brokerages was robust in the summer and fall as investors tried to keep up with the volatility of U.S. markets. The fees generated from the frantic trading helped brokerages offset the profit-sapping effects of near-zero interest rates.

With the decline in trading volumes, earnings for the quarter ended December 31 at Charles Schwab Corp (>> The Charles Schwab Corporation) and TD Ameritrade Holding Corp (>> TD Ameritrade Holding Corp.) are expected to be roughly flat from a year ago, but down from the third quarter, according to the average forecasts from Thomson Reuters I/B/E/S.

"Investors are stepping aside," said Fred Tomczyk, chief executive of TD Ameritrade Holding Corp, which releases results for its fiscal first quarter, ended December 31, on Tuesday. "People are quite nervous about what's going on with Europe."

BMO Capital Markets said earlier this month that, based on checks with private brokerages, daily average revenue trades at the discount brokers likely fell between 14 percent and 17 percent in December from November, well below the firm's initial estimate of an 8 percent decline.

TD Ameritrade is the No. 1 U.S. discount broker by trading volume and its results are often seen as a proxy for the mood of Main Street investors. The company derives more than 40 percent of its annual revenue from trading fees and commissions.

Schwab releases its results on Wednesday and E*Trade Financial Corp (>> E TRADE Financial Corporation) does so on January 25. Trading represents about 20 percent of revenue at Schwab and a little under 30 percent at E*Trade Financial.

Tomczyk said the decline in trading can be traced to investors who grew weary of the uncertainty in markets after months of trying to keep up with the daily swings that were largely a result of the ongoing debt crisis in Europe.

ASSET GROWTH

Fees on assets and interest revenue - the other main revenue sources for retail brokers - have already been under pressure because of three years of near-zero interest rates and weakness in markets.

U.S. interest rates are expected to stay at current levels - the fed fund rate ranges from zero to 0.25 percent - until at least mid-2013.

Last month, Schwab, one of the biggest U.S. brokerages, with about $1.67 billion in client assets, said its fourth quarter earnings would likely be 4 cents to 6 cents lower than its third quarter earnings due to margin compression. The warning caused a flurry of downgrades of expectations by analysts.

Low rates have also led retail brokerages to waive fees on money market funds to avoid negative returns for their clients.

Schwab waived $400 million in money market account fees on in the first three quarters of 2011. The company fee waivers could be $165 million in the fourth quarter because flows into the funds, viewed as safer than equities, had increased.

"The big question right now is, given the rate environment, how much of an impact is that going to have moving forward and what are the opportunities to grow to offset some of the rate pressure that we expect to see," said Chris Allen, an analyst at Evercore Partners.

Net new asset growth, which comes partly from registered investment advisers who use the firms' custodial services, has become a big focus for the discount brokers as they look for new ways to grow revenue.

Aside from attracting new advisers to their platforms, the discount brokers have also been offering services such as options trading and IRA rollovers to clients to bring in more assets.

E*Trade estimates its clients keep only about 10 to 12 percent of their overall financial assets with the firm, or $180 billion to $190 billion.

"Even in a low-rate environment (discount brokerages) can get some juice out of that interest rate business by growing assets," said Gaston Ceron, an analyst for Morningstar in Chicago.

TD Ameritrade has led the group in gathering assets with 12 percent annual growth in its last fiscal year. E*Trade was at 7 percent last quarter and Schwab was at 6 percent.

(Reporting By John McCrank; editing by Jennifer Merritt and Andre Grenon)

By John McCrank