The world has changed a lot since John Jensen started trading futures as a retail customer at the San Diego branch of Conti Commodities 29 years ago.
“They had a day-trading area with a ‘clacker’ board up there,” he says, referring to the old quote boards that changed display by flipping metal discs instead of jolting even littler pixels.
“There were like 15 or 20 guys who would come in every day to trade,” he recalls. “Behind you, there was a whole bank of brokers, so you could talk to the person next to you and if you had a question about your order, your broker was right there.”
Now, as president of Heritage West Financial, a five-man introducing broker (IB) based in San Diego, he’s trying to give that same service to online traders interested in quick fills and low prices.
“It’s hard to compete with the big guys that specialize in online because they can beat us on price,” he says. “We have to beat them on service.” The big guys, meanwhile, have identified a basic range of human services they say customers need, while trying to compete on the value they can add with proprietary analysis.
Every brokerage, large and small, seems to agree that if there’s one area where clients need human support, it’s in order placement. “With all these electronic exchanges sprouting up, creating parallel markets but with different starting and ending times, you find traders getting confused,” says Jensen. “There are lots of pitfalls that we try to help them avoid.
He cites two examples. “The S&P closes for a half-hour then opens up and trades again,” he says. “If you place your afternoon order too early, it may expire a few minutes later. You think you’re in the night session, but you’re not. Then you have gold —where a gap exists between the Chicago and New York markets. Well, what happens if you’re in one and need to get out while the other is still trading? The two contracts are not fungible, but you can put a spread on and do the other one, then off-load it when both markets are trading. This is the kind of service it’s just a lot easier to learn from a human.”
Interestingly, IBs are going strong in this online age. Commodity Futures Trading Commission (CFTC) statistics show that the number of IBs peaked at 1800 in 1989, then slid to below 1400 by 1993, but had rebounded to 1600 by 1999 – where it has remained ever since (see “IB resurgence”).
“The variation from that point is pretty small in numbers, although there is a lot of turnover,” says Jensen, who also serves as president of the National Introducing Brokers Association (NIBA). “We see about 15 or 20 new registrants every month and an equal amount disappearing. It’s a tough business and if somebody can stay in it for five years, you know they’ve weathered all the storms.”
Not all of them, however, can be called brokers per se. “Some of them have their IB registration in conjunction with other business they do, while others are one-man shops working out of their homes,” he says. “Still, there are some segments where the human touch is really important. There are people in the Midwest that live and breathe the agricultural markets, for example — and they add value by knowing how to hedge specific risk.”
THE BIG BOYS
Log into two of the biggest retail derivatives platforms and you’ll instantly find both similarities and differences. MF Global and optionsXpress each offer outside analysis and access to futures brokers who can help you understand the basics and each offers an impressive array of charts and third-party analysis. Neither offers full-service accounts where brokers take power-of-attorney or proactively call customers with recommendations, but MF Global does offer both managed futures and a type of mid-service account where brokers can discuss research and trading strategies.
A similar service is offered by brokersXpress, a subsidiary of discount online broker optionsXpress, says Dan O’Neil, executive vice president of futures at optionsXpress and former partner at online futures broker XpressTrade, which optionsXpress acquired in January 2007.
“Though optionsXpress customers are self-directed and call their own shots, we do have Series 3 and Series 7-registered experts in-house to answer questions and provide assistance without an increase in commission,”
he says.
DIVERSE OFFERINGS
Customers from XpressTrade have now migrated to the optionsXpress platform, which had evolved as an options-focused platform that also offered stocks, bonds and mutual funds, but which now serves both equities and derivatives traders — who O’Neil says are themselves converging.
“We did the merger because both [optionsXpress vice chairman] Ned Bennett and I felt the line between futures and securities was blurring,” he says. “We shared a vision that individual investors should have access to stocks, equity options and futures, all in a single account.”
He says the human element extends to helping customers execute a strategy based on the direction they believe the market will move but not to tell them what that direction might be. “For example, if you’re an investor who thinks that gold may be going up, we can show you a variety of different possible trading strategies and put a number of different trading and investing vehicles at your fingertips. This could range from gold mining stocks, the XAU Gold Index, the GLD ETF product, gold futures and options on gold futures,” he points out.
The company is also in the process of putting non-U.S. (and non-dollar) products onto its platform. “Within a few months, it will be just as easy for you to trade on SGX (Singapore) or the Ibex on Meff (Spain) as it is to trade at the CME in Chicago,” O’Neil says.
Both companies use outside advisors whose research is offered to clients. One advisor on both companies’ list is David Hightower, former director of research at Stotler & Co., who has been providing fundamental analysis of futures markets to brokers for more than two decades — often white-labeling it, so that the end user doesn’t know where it came from. “A high percentage of people are getting something in some form from me,” he says. “Some will take everything I offer, while others will say they just want to post a certain amount of information on their Web site. One may have me anonymously next to a weather guy, while another will have me on tap for a client who comes in and needs hedging advice.”
MF Global not only takes his analysis, but brings him in every Monday at 6:30 in the morning to prep brokers. “With these meetings, I basically tell them what we’re looking at for the week and provide strategy papers,” he says. “In my mind, it’s important to have a fundamental opinion or view, but you need to put together a strategy for that view because of the volatility and complexion of the market.” While Hightower offers analysis but steers clear of putting out specific trades, others offer only trades and steer clear of analysis.
TOO MANY COOKS
“There is this trend towards coaching,” says Peter Lawler, COO of OptionsHouse — a two-year-old brokerage specializing in equity options. “Coaching is when you help a client devise a strategy without giving specific advice, but I feel it gets into the gray area for online brokers from a compliance perspective.” So, like optionsXpress, he’s offering a combination of proprietary and third-party analysis. “We’re looking at where options traders go to get information and then looking to do partnership deals with them,” he says. “But it’s also important to look not just at how popular a third-party provider is, but how good they are — and that’s not always easy to evaluate.”
Hightower says he has more competitors than ever before. “The big move to online has created a significant amount of competition, because everybody who’s got a keyboard and can formulate an opinion has jumped on and started doing so,” he says. “A lot of this stuff is being offered for free and it’s troubling because you get reporters out there quoting these free analysts they find on the Internet – analysts who say something about the cocoa market that’s not even in the right stage of the production. Not all of this stuff is from people who have been doing it for 20 years.”
PROPRIETARY PUSH
Both optionsXpress and OptionsHouse offer an array of proprietary analysis tools that will scour charts and data in search of patterns that a trader feels are indicative of future moves. “It’s getting pretty amazing what you can do, both in terms of technical analysis and order entry,” says Lawler. “For example, you have orders that are triggered at a certain time and you have other orders that can be triggered by a percentage move in the underlying stock. Pretty soon, we’ll be able to have an order that does both.”
He says such orders could come in handy on days if a Fed announcement is expected and a trader wants to fade it. “If the announcement is expected at, say, 1:15 p.m., he can put in an order that goes active at that time and recognizes the current price, then gets triggered by a percentage move in the stock and is good for the day. You can start to get pretty sophisticated, especially when you consider that just a few years ago a simple trailing stop was as sophisticated as you got.”
Lawler, a 14-year veteran of the Chicago Board Options Exchange, acknowledges that optionsXpress offers more bells and whistles. In comparison, he describes his platform as “simple but powerful” and closer to the interfaces used by professional traders.
“You need fewer mouse clicks to execute a trade, for one thing,” he says. “For example, if you’re long 50 calls and decide it’s time to get out, you just click on the bid price of the option that you’re long and it fills out the ticket that way. You can adjust it from there or hit ‘confirm’.”
For simplicity, however, nothing beats the Oanda platform where the chart also can serve as the order-entry interface, but Lawler’s platform gives you the ability to take options trading to a whole new level. Another button brings up all the Greeks, implied volatilities and risk analysis tools of the market-making trade — which Lawler says are being used more and more by ever more sophisticated retail options traders.
“The most successful people in this market either use options to hedge existing stock positions or develop strategies that make a little bit of money a lot,” says Lawler. “The singles-hitters who understand there are ways for them to be risk-sellers, get paid for it, in a very, very limited risk way and make 10 to 15% a year, which is a pretty solid return.”
As companies perceive new ways to differentiate themselves in the online arena, more are expected to enter the market – but it won’t be easy. “It is extremely difficult to build an options platform,” says Lawler. “That limits the number of firms willing to make the investment – either by learning how or putting out the money for talent.”
At the rate things are progressing, you can bet today’s platforms will seem as quaint 29 years from now as Jensen’s clacker boards do today.
