Driven by fierce competition for equities trading flow and a desire to make their own research stand out, online brokerage firms are starting to jazz up their research products by including insights gleaned from the options market. Already, Charles Schwab said it plans to offer such products before the end of the year, while archrival Ameritrade said it is considering such a move.
The expanded research product is debuting at a time when shrinking equity trading commissions are squeezing online trading firms particularly hard and forcing them to consolidate. But online traders are not the only ones who see the potential value of melding options insights into stock trading. Trading and options powerhouse Susquehanna Financial Group has been doing just that for nearly three years, ever since it launched an institutional brokerage group (see IDD cover, "Susquehanna's Big Bet," 10/10/05.)
But for online retail brokers such as Schwab, options-flavored research could pay off in two ways. On one hand, options' behavior can bolster equity research by providing clues about the movements that options investors are expecting in underlying stocks. On the other, research on options themselves can help attract additional trading in options, which is more profitable than equity trading-another potential revenue boost.
At Schwab, options research will be offered both ways, according to Randy Frederick, director of derivatives and the senior registered options principal at Schwab's CyberTrader, a unit that targets the more active traders among Schwab's clientele. Frederick, who is a frequent commentator on the derivatives markets, already makes his comments and insights available to Schwab clients who want to speak with him. Frederick also writes articles in a monthly newsletter that goes out to Schwab clients, in which he writes on such topics as how put/call ratios and implied volatilities are used to help gauge market sentiment, or how to use options industry volume as a barometer for the equity markets.
Options have been making significant strides in volume and use. The Chicago Board Options Exchange (CBOE) announced last week that its September trading volume surged to 41.2 million contracts, an increase of 56% over the 26.5 million traded in September 2004. The strong showing was driven by significant gains across each of its major product lines-index options rose 64%, equity options rose 50%, and options on exchange traded funds rose 76% from September 2004. Average daily volume for the month was 1.96 million contracts, a new CBOE record. Through September, total year-to-date trading volume at the CBOE now stands at more than 334.9 million contracts traded, 28% ahead of last year's record.
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Copyright (c) 2005 Gale Group Company
10/18/2005 10:16:46 PM [Investment Dealers' Digest]
