The performance of big online brokers may be improving after a poor 2010 as a trading rebound and a better economic outlook boosted quarterly profits at TD Ameritrade Holding Corp and Charles Schwab Corp .

The top two U.S. discount brokerages and fund managers reported higher core earnings on Tuesday, meeting expectations with the help of asset growth, and company executives sounded more cheerful about the year ahead.

Client trading at TD Ameritrade, which runs the top online trading platform, rose 17 percent from the previous quarter and another 21 percent in January as an upbeat stock market drew in more individual, or retail traders.

What a difference 90 days can make, TD Ameritrade chief executive Fred Tomczyk said on a conference call with analysts and media. For the first time in a long time, we are seeing mutual fund flows shift out of bond funds and into equity funds.

Schwab, which has a larger market cap and relies less on trading activity, logged better trading in its fourth quarter compared to the third quarter and to last year.

Industry activity levels are fairly robust, and you're seeing the usual pick-up that comes at the beginning of every year, which is a positive sign, said Sandler O'Neill analyst Richard Repetto.

Both companies beat Wall Street's revenue expectations, with analysts partly crediting asset gathering.

Revenue may rise more when the U.S. economy improves and the Federal Reserve lifts interest rates. For more than two years, the near-zero rates have hampered TD Ameritrade's and Schwab's ability to earn fees from money market funds.

Schwab shares slid 1.3 percent on Tuesday, while TD Ameritrade slipped 0.7 percent. They had risen 35 percent and 29 percent since the beginning of the last quarter as stronger economic data stoked expectations for an earlier-than-expected rate rise.

Schwab's net new assets were up 6 percent at $26.2 billion in the quarter, while that of TD Ameritrade jumped 11 percent to $9.7 billion.

We are at a point where we're beginning to grow again, despite what goes on in the economic environment, Schwab Chief Financial Officer Joe Martinetto said in an interview.

When interest rates do move up ... we will see a period of dramatically better financial performance, he said.

BETTER YEAR AHEAD?

Schwab logged a big one-time charge because of a $119 million regulatory settlement related to its YieldPlus mortgage-bond mutual fund.

The San Francisco-based company earned $119 million, or 10 cents a share, in the fourth quarter, down 27 percent from a year earlier. Excluding the one-time charge, Schwab's profit was up 33 percent.

Revenue rose 14 percent to $1.13 billion.

Omaha, Nebraska-based TD Ameritrade earned $145 million, or 25 cents a share, in its fiscal first quarter, up 6 percent from last year. Revenue climbed 5 percent to $656.2 million.

It was a solid quarter with an impressive performance bringing in new client assets, Raymond James and Associates Patrick O'Shaughnessy said of TD Ameritrade. The rebound in retail trading activity during the December quarter was apparent.

The recent uptick could signal a better year ahead for the companies after an uncertain economy and depressed trading volumes, especially after the May flash crash, made for a difficult 2010.

The key U.S. federal funds rate, the rate on overnight loans between banks, has remained near zero for more than two years as the United States struggled to recover from the recession. It has hurt asset managers who rely on interest-based revenue and management fees.

TD Ameritrade waived $12 million in money market fees in the last quarter, in line with the previous quarter. Schwab waived $102 million, up from $93 million.

TD Ameritrade and Schwab have had some success in encouraging clients to move investments from money market mutual funds to alternatives.

Schwab's YieldPlus settlement nearly closes a drawn out legal battle for the company. Regulators charged it with hiding from investors the risks in the YieldPlus fund.

The U.S. Securities and Exchange Commission announced the settlement on January 11, and filed a civil lawsuit charging two Schwab executives with violating securities fraud laws.

Schwab's Martinetto said any remaining impact from the YieldPlus claims or suits shouldn't be noticeable going forward in the company's finances because of reserves.

It's really nice to have a number of things behind us ... related to cleaning up the impacts of the financial crisis, he said.

(Reporting by Jonathan Spicer. Editing by Robert MacMillan)