Wall Street & The Options Market

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Wall Street Is Waking Up To The Options Biz
It wasn't long ago that most Wall Street analysts considered the derivatives markets to be a dangerous and arcane financial backwater. Derivatives might be useful tools for executive compensation or for sophisticated hedge funds, but the real action was in the equity and fixed income markets.

However, that viewpoint changed with the initial public offering of the Chicago Mercantile Exchange (CME). The CME IPO, and the subsequent explosion of CME stock, awakened Wall Street to the enormous profit potential lurking in the derivatives markets.

Of course, it wasn't long until those same analysts were drawn to the nearly exponential growth rate of the options market. These days, with several options exchanges operating as public companies and the remainder considering IPOs, Wall Street analysts/researchers have become fixtures at options industry events. While many of them are relative newcomers to this business, they offer an interesting outside perspective on the intricate world of options.

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In this article, we will run down some of the more intriguing, inflammatory and bizarre analyst comments from recent options industry events:

Q: WHAT IS THE LARGEST HURDLE FACING THE OPTIONS MARKET?

• "The theme we continue to hear across the board is education,"said Michael Ryan, Head of Wealth Management Research at UBS. "Most of these companies like optionsXpress have great tools, but most of their customers donít know how to use them. So they are spending a considerable amount of time on seminars and meetings so that their customers can do more than just buy calls."

Q: HOW MUCH OF AN IMPEDIMENT IS THE REGULATORY ENVIRONMENT?

• "In the options world, regulation makes or breaks you," said Richard Repetto, Partner, Sandler O'Neill & Partners. "It has made deals and undone them. The best exchange management teams are the ones that are very active and knowledgeable on the regulatory front....The Penny Pilot is a good example of the interaction between regulation and the industry. It seems that the SEC did a fairly good job with the penny pilot in terms of being reasonable and taking input from the industry."

Q: IS THERE ROOM FOR NASDAQ IN THE OPTIONS MARKET?

• "NASDAQ had fantastic tech in the equity side that they think they can lever into the options market," said Ryan. "They only spent about $10 million to adjust their equity platform to options, so it didnít cost much for them to do it. Their overall goal is to achieve a twenty percent market share. However, even five percent would be a tremendous success for them since they such a small capital investment."

Q: MULTINATIONAL EXPANSION & CONSOLIDATION IN THE OPTIONS MARKET?

• "I donít expect the options exchanges in this country to remain as single, separate exchanges," said Brad Bailey, Senior Research Analyst, Aite Group. "I expect them to become part of broader multinational exchanges. At the same time, technology is changing the fundamental structure of the industry in terms of who provides liquidity, etc. "

• "What people have to realize is that itís not about America competing with itself," said Brendan Caldwell, President and Chief Executive Officer, Caldwell Investment. "Itís about America competing with the rest of the world. Most options exchanges around the world do not operate as stand-alone exchanges. But the challenge is two-pronged,  they need to streamline regulation and also make it easier for international investors to feel more comfortable using your capital markets."

To Be Continued In "Part Two: Is There Room For NASDAQ?"


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