Equity options market fears higher costs
So it was refreshing to hear that online broker OptionsHouse is bucking the trend by opening a non-clearing FCM, scheduled for the 2nd quarter of this year. Focusing on retail, a segment that has seemingly gotten lost in the shuffle, even though it represents the fastest growing area of the market. Clive Furness of Contango said he played more tennis yesterday than he had in his entire life.
All for the kids. Again, all for the kids. We want to thank the FIA for putting the name tags for the press on bright orange paper; call it hunting orange. We learned this when we showed up at a CME Group cocktail party and he was present. See the press release below.
Additionally, we heard brief presentation by industry legend Richard Sandor and his newest innovation, the American Financial Exchange , the fledgling marketplace serving small and mid-sized banks, with which CBOE has teamed.
AFX plans to launch its interest rate benchmark, Ameribor, later this year. For more on AFX, see our recent interview with Sandor. But whereas Tradelegs is aimed at institutional investors, Vest caters to the retail marketplace. Equity options market fears higher costs Philip Stafford and Nicole Bullock — Financial Times Users of the US equity options market fear they face higher costs as the latest industry consolidation involving Nasdaq is not seen alleviating a fragmented landscape of trading venues.
By taking control, Nasdaq will decisively leapfrog the Chicago Board Options Exchange to become the biggest operator in a field of 14 exchanges, with a 40 per cent market share. One manifestation is pricing power — exchanges are starting to charge significant amounts for data. It means you have to buy the data feeds from all the exchanges.
Chicago-based CME is also assessing whether to make a bid, according to people familiar with the matter. If there is a spoiler for deal, can it come in a form ready-made for the movies? Exchange merger set to raise temperatures in Florida Philip Stafford — Financial Times The redrawing of the global exchange landscape and its potential fallout is set to dominate the agenda as the global derivatives industry gathers in Florida this week.
The event has long had a history as a hotbed of dealmaking as senior exchange executives mingle with each other and their main users such as hedge funds, asset managers and high-frequency traders, as well as bankers and lawyers. Futures trading is currently available at OptionsHouse, but by establishing its own FCM, the company will be able to further enhance the futures trading experience for its customers.
Not only will the time and effort required to open a futures account be significantly reduced, additional cash management and trading strategies will be available. Customers will be able to trade electronically and access licensed OptionsHouse professionals at a full-service desk, 24 hours a day, six days a week. The partnership made Options Clearing Corporation OCC the first central counterparty CCP to establish a committed liquidity facility with a non-bank, all for the purpose of mitigating concentration risk.
We already have a lot of bank risk and the way regulations are evolving and being implemented has put a lot of pressure on the costs of these kinds of facilities and more importantly the long term suppl goo. Seven directors were elected at this meeting for one and two-year terms. CME Group sells data center outside Chicago, to lease back space Reuters CME Group Inc has agreed to sell the Chicago-area data center that houses its electronic trading platform as part of a drive to cut costs.
CyrusOne, a Texas-based company that owns more than 30 data centers worldwide, will purchase the building in Aurora, Ill. As part of the deal, Chicago-based CME will sign a year lease for space in the , square foot building. Just be sure they are the right questions. In doing so, the bank or broker needs to decide on which exchanges it makes available to its customers and publish annually the top five list of exchanges on which orders have been executed.
The partnership has been awarded the mandate to provide technology, global business and local operational expertise to launch the first Derivatives market and fully integrated clearing house in Vietnam. Investment office Capital Generation Partners uses private equity as a source of return in portfolios where volatility can be absorbed over the long term, and the firm discusses investing in the asset class when they first take a client on, says founder Charlotte Thorne.
Different clients view private equity in different ways, she reports. Entrepreneurs come from a slightly different perspective. There are a number of ways to gain access, each with their pros and cons, but getting it right is vital. Club deals, where investors pool together, are more talked about than actually put into practice by investors, she says, as private equity transactions require clear and swift decision-making, which these structures make difficult.
Direct investments give the investor more control but can pose too great a burden in terms of management capability and cash requirements on individual investors, who struggle to compete with the funds and tend to make suboptimal investment decisions. Furthermore, access to the best funds is difficult to achieve.
Private equity relationships are built over the long term and work best for professional investors. There has definitely been a shift towards increasing retail and wealth management participation in private equity in recent years, reports Richard Hickman, director of Investment and Operations for HarbourVest Global Private Equity, and there is clear potential for further growth.
Listed private equity is one of the few ways smaller investors can tap into this. The pace of fundraising in recent years demonstrates the growing popularity of private equity, but also means there is sometimes a surplus of capital chasing certain deals, which tends to push prices up.
One trend pushing investors towards private markets is the fact many private companies are choosing not to list themselves on public markets.
So it is necessary for wealth managers to provide their clients with ways of gaining access to these private companies. It is not straightforward, but it is possible to get into that marketplace in a way in which you can offer it to the retail market.
The big technology companies are staying private for longer and anyone overlooking them will miss out in the long run, says Marc Posso, portfolio manager at Man Capital. The popularity of private markets stems from concerns that public markets could be about to crash, he says, although he does not foresee that happening. These companies are lured by the better risk-return profiles on offer if they partner instead with pools of capital such as private equity.
Alternatives are not for everyone, he warns, but the level of innovation happening in California, Europe and increasingly Asia, means there are plenty of investment opportunities on offer for sophisticated investors ready to be locked in for 10 years or more. Many of these opportunities remain the preserve of institutional investors however, says Charu Lahiri, investment manager and head of alternatives research multi-asset manager Heartwood Investment Management.
In response, the firm set up an investment company, the Heartwood Alternatives Fund, which its multi-asset portfolios can make an allocations to, and which can then invest into a whole range of alternatives that would otherwise not be available to its clients. The firm views alternatives as diversifiers. Clients are definitely expressing increased interest in alternatives, reports Nicolas Campiche, CEO of Pictet Alternative Advisors, as they have low expectations of returns in traditional asset classes, see the high valuations in equities and are wary of a bond market that presents more risk than upside.
We think expected returns in alternatives, broadly speaking, are higher than in traditional asset classes. They are looking for both diversification benefits and returns, says Mr Campiche, though not all alternatives will provide the two. Those seeking diversification should be aware that private equity can be closely correlated to stockmarkets, he warns, but investors can collect an illiquidity premium.
In addition, the ability of a private equity manager to help transform a company is also worth considering, adds Mr Campiche. Prices in private equity might be high, he admits, particularly in the large buyout transactions in the US, but that does not mean there are not opportunities worth exploring. Wealthy individuals expect private banks to be able to provide them with access to alternatives, says Gavin Rankin, head of managed investments at Citi Private Bank.
So it is important in terms of asset allocation, but also in terms of our ongoing engagement with clients. There is a growing trend for clients to barbell their portfolios, he reports, for example by using low cost ETFs to provide market beta in public markets, and then finding alpha through private investments, where there is a greater chance of generating returns through manager skill.
There has been an increase in assets flowing into illiquid investments, particularly private equity and real estate, adds Mr Rankin, though hedge funds are still suffering from the bad press they received following the financial crisis. Many real estate investments performed badly as well. A lot of private equity also underperformed. But they managed to escape the tarnishing that hedge funds found it harder to brush off. Private equity and real estate may have suffered following the crisis, but they recovered and have since performed strongly, whereas hedge funds have suffered primarily because a lack of volatility in markets, he says.
It is not rare to find clients with 20 per cent of their portfolio in private equity and real estate, says Mr Rankin, but allocations to hedge funds have fallen significantly. Today that is going to be low single digits. Some of that money has flowed into other alternatives, he says, and some into public markets, but he does think there is an opportunity for hedge funds to reclaim some of those assets, though this will be a gradual shift in conjunction with a broader change in how markets are performing.
There has been such an extended cycle of positive performance in equity markets that investors are now looking to adapt their exposure, explains Mr Heinz. Meanwhile the pressure on hedge funds to reduce their fees continues, he says, with institutions always looking to reduce their costs.
Private banks are displaying a renewed interest in this sector, claims Patrick Ghali, managing partner and co-founder of hedge fund advisers Sussex Partners, as they look to protect their clients in the event of an equity sell-off while alternative credit strategies also appeal.