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Algorithmic trading gives UBS, Goldman edge over options brokers

Algorithmic trading gives UBS, Goldman edge over options brokers
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First Published: Tue, Mar 20 2007. 01 19 AM IST
Updated: Tue, Mar 20 2007. 01 19 AM IST
New York: Kevin Fischer spent 17 years as a floor trader at the Philadelphia Stock Exchange until Interactive Brokers Group Inc. moved him to its headquarters in Greenwich, Connecticut.
Now he sits in front of a computer screen, creating a trading system to help investors use algorithms, sets of rules calculating the best time and price to buy or sell securities.
Fischer is caught in the middle of a regulatory change that’s throwing about $1 billion (Rs4,400 crore) of commissions up for grabs annually and putting Interactive, the world’s largest options broker, on the defensive.
The shift to quoting puts and calls in 1-cent increments from nickel or dime spreads plays to the strengths of Goldman Sachs Group Inc., Credit Suisse Group and UBS AG, which adjusted to penny pricing in stocks six years ago and now trade the most shares electronically. Closely-held Interactive depends on veterans like 44-year-old Fischer to succeed as algorithmic specialists or it risks losing its dominant share of the fastest-growing US securities market.
“All the major brokers are working on this or are pretty advanced in their planning,” said Brad Bailey, a former options and stock trader who’s now an analyst at Boston-based consulting firm Aite Group LLC. “With pennies and all these things coming together, it’s just going to explode the volume in options.”
Goldman, the world’s largest securities firm by market value, is retooling its options trading software to mirror that for stocks. With its REDI trading system, the New York-based firm last year eclipsed Zurich-based UBS, Europe’s biggest bank, as the largest broker at the New York Stock Exchange, according to data from the Big Board.
Interactive is responding by reassigning about five more options traders from markets across the country to Greenwich, where they’ll handle orders from institutional investors, Fischer said. The company also entices clients with customized algorithms and penny pricing on all options.
Every firm on Wall Street wants a bigger piece of options trading because the market is growing twice as fast as demand for stocks. Average commissions reported by institutional investors rose 51% last year, according to a survey of 49 funds by Greenwich Associates, the 35-year-old financial-services consulting firm in Greenwich, Connecticut. Institutional investors, who account for about 60% of total trading in options, paid at least $500 million in commissions last year.
“Estimating the total commission pie in options isn’t as easy as in cash equities, where the business is more transparent,” said John Feng, a Greenwich principal. “Relative to equities, options are small. But generally speaking, derivatives are seen as a profitable and growing area for the brokerage firms.”
Investors traded about two billion contracts at the six US options exchanges last year, up 35% from 2005, according to data compiled by Chicago-based Options Clearing Corp., which guarantees all transactions in the US market. By comparison, stock trading at the New York Stock Exchange and the Nasdaq Stock Market increased 17%.
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First Published: Tue, Mar 20 2007. 01 19 AM IST
More Topics: Money Matters | Derivatives |