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 thederivatives markets to be dangerous and arcane financial backwaters.Derivatives might be useful tools for executive compensation or forsophisticated hedge funds, but the real action was in the equity andfixed income markets.

However, that viewpoint changed with the initial public offering of theChicago Mercantile Exchange (CME). The CME IPO, and the subsequentexplosion of CME stock, awakened Wall Street to the enormous profitpotential lurking in the derivatives markets.

While the CME may have gained their attention, thenearly exponential growth rate of the options market soon became an endless source of fascination for many Wall Street analysts. These days, withseveral options exchanges operating as public companies and theremainder considering IPOs, analysts/researchers havebecome regular fixtures in the options industry. While many of these analysts arerelative newcomers to this marketplace, they offer a refreshing outsideperspective on the often insular world of options.



In this article, we will examine some of the more insightful, intriguing,inflammatory and downright bizarre analyst comments from recent options industryevents:

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 the regulator 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."

Continued In: "Part Two"...

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