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June 20, 2005

Are Options Specialists an Endangered Species?

By Gregory Bresiger

It's a bad time for options specialists and specialists in general.

LaBranche & Co., a bellwether specialist firm, reported poor first quarter earnings-$2.2 million versus $6.9 million for the same period of 2004. But, more importantly, several options exchange officials are pushing for rules that would allow brokerages to route orders to a designated market maker. That move is having a dramatic effect, said one exchange official.

"What has changed so much in the options business is how few firms are left in the specialist business and how few independent market makers are left," Meyer "Sandy" Frucher, chairman and chief executive of the Philadelphia Stock Exchange, told Traders Magazine.

Despite continuing tough times for specialists, Frucher said some will survive and prosper. But, he added, that they "must evolve to become both specialists and market makers."

That, Frucher noted, will mean firms must be both liquidity providers and have superb technology.