Weeden & Co, in what has become a trend among stock-centric institutional brokerages, has gone into the options business.
With commissions in decline on the cash equities side of the business, Weeden has assembled a team of four options professionals in order to tap into what is often a distinct commission pool. In doing so, Weeden joins a growing list of small and mid-sized institutional brokers hiring options pros.
“We took our time moving into options as we wanted to get the right people all at the same time,” explained Lance Lonergan, Weeden’s co-chief executive officer. “We didn’t want to put together the team one by one.”
The hires by Weeden are the latest in a string of hires by institutional broker-dealers in the past few years. Instinet, Investment Technology Group, Knight Capital Group, Cowen & Co., Rosenblatt Securities, and CAPIS have all either launched or beefed up their options coverage lately.
In Weeden’s case, the four pros it brought on board each plays a different role. Leading the team is Michael Purves, a well-known strategist, seen often on CNBC, Fox News, and Bloomberg TV. Ross McMeekin has a background in marketing, having helped to develop analytical and investment management software at Bloomberg LP for institutional options trading.
Jeff Fittipaldi and Bronson Plocus are the traders. Fittipaldi’s experience is on the agency side of the business, while Plocus is a former volatility trader, or market maker. All four individuals have sales responsibilities. They bring to Weeden their own accounts and will, of course, work with Weeden’s existing clients.
Purves, McMeekin, and Fittipaldi worked together at Pali Capital until that brokerage shut down two years ago. Afterwards, Purves and McMeekin headed to BGC Financial. Fittipaldi went to Knight Capital Group.
Driving the hires is a need by Weeden to offset declines in the equities commission pool and a bet that options usage on the buyside will grow. Commissions for stock trades declined for the third straight year in 2011, according to a recent report published by Greenwich Associates.
By contrast, listed options volume grew for the ninth straight year in 2011. And while, sources say, there has been some rate compression on the options side, it has not been as bad as that of cash equities. Lonergan explains the buyside has more flexibility when it comes to options commissions because the funds are generally not tied to cash commissions and the broker vote. “Options are so new for so many accounts that they just haven’t embedded those commissions into their overall vote yet,” Lonergan said.
The hires mark Weeden’s first foray into options. And, while most of the expertise will reside with the four newcomers, the addition of options necessitates the involvement of Weeden’s entire trading operation, Lonergan noted.
Weeden’s cash equities traders are now required to discuss the product with their clients in addition to their usual duties. For some that is not expected to be a big hurdle–especially for those sales traders that previously worked alongside options pros at the bigger firms. But for others, “we certainly have some teaching to do,” Lonergan said.”
While Weeden is well-known for the quality of its stock trades, winning those options orders is not simply a function of trading savvy. Providing the buyside with guidance is crucial. That’s why the options effort at Weeden—like that of most of institutional brokers—is spearheaded by a strategist armed with trading ideas.
A strategist is a necessary ingredient, according to Phil Gocke, managing director of research and educational strategy for institutional investors at the Options Industry Council. “It is true that options are more complicated than straight long positions,” he said, “so having some guidance is necessary. It’s also a door-opener for getting new clients and keeping existing clients.” (ITG took a similar tack last year when it hired veteran Ralph Edwards as a derivatives strategist.)
Currently, Purves is advising clients that the market is poised for a repeat of the volatility experienced last year that arose because of the financial problems in Europe. In the near term, the strategist predicts a decline in the S&P 500 Index from its current level of 1,330 to 1,250. Purves is recommending the construction of a “put spread” on the Russell 2000 Index, involving the purchase of two July 73 puts and the sale of one July 69 put.
By and large, Weeden’s majority long-only clients are looking to hedge their existing stock positions or generate yield from them, Lonergan explained. The former can involve buying puts while yield is often generated by selling covered calls. These are basic strategies used by owners of stocks.
Gocke explains that covered call writing is the most popular strategy among long-onlys. The trades have allowed investors to weather the Europe-driven turbulence of the past two years and still hold onto their stock positions.
While options have long been popular with hedge funds, they are only gradually becoming a part of the workflow of long-only traders. On a scale of 1 to 10, options usage by long-onlys rates a “4,” Lonergan says. “We have a long way to go,” the exec said. “But we expect many more accounts to start trading options.”
