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February 1, 2011

Market Maker to Persevere

By Peter Chapman

LaBranche & Co. is down, but not out. The trading house has stopped making markets in equity options on exchange floors, but vows to return as an electronic market maker. After suffering a second year of losses in options trading, LaBranche has stopped making markets on the three exchanges where it was active.

Michael LaBranche

"We don't plan on exiting [the business] altogether," chief executive Michael LaBranche told analysts last year. "We are making a move to making markets on a more electronic basis. Those are much smaller trades, and they are much smaller positions. We are going to approach the business differently."

LaBranche, which operates an institutional brokerage and a market-making unit, lost $13 million on the market-making side last year. It blamed internal problems and narrow spreads for the problems in stock options. Last year was the second year in a row in which the firm lost money in options trading.

The trading house, best known as a New York Stock Exchange specialist, sold its NYSE floor business to Barclays Capital a year ago. It has also quietly exited the options market-making business, giving up its memberships at NYSE Amex Options and Nasdaq OMX PHLX. At the Chicago Board Options Exchange, it recently changed its status from market maker to proprietary trader.

LaBranche has been steadily shedding its options positions. Between the third quarter of 2009 and the third quarter of 2010, the firm reduced its long positions by $2.5 billion to $1.1 billion. Most of the purge was in the options book.

Tighter spreads, a result of the move to trading in penny increments in 2007, have wreaked havoc with small market makers. Their numbers continue to decline as the business moves into the hands of larger, more electronic firms. At CBOE, for instance, about 50 market makers have dropped out of the business in the past two years. That leaves about 100 of CBOE's 200 members as registered market makers, according to the exchange.


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