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August 1, 2013

Above the Fray

I.A. Englander Expands Into Prime Brokerage to Sustain its High-Touch Model

By Mary Schroeder

I.A. Englander & Co., a floor-based options execution provider and an agency broker, is broadening its offering to survive in an age when relationship-based trading has lost its sway and electronic trading is reshaping the business.

The spread of electronic trading has reduced commissions, forcing Englander to offer more than executions to maintain a higher-margin business. To that end, it is now offering prime brokerage and investment advisory services.

Stephen Tobias

"The floor-based business is a relationship-based business," like the equity business used to be, said firm president Stephen Tobias. "And that and the interdealer-broker agency brokerage business has commoditized itself as much as the equity business has over the last three years, where the commission business has been a race to zero."

Englander, owned by famed hedge fund manager Israel "Izzy" Englander, and affiliated with his giant Millennium Partners hedge fund, has offered options trading services to money managers and other broker-dealers since 1977.

Best known as a floor broker, it has had to confront declining average commission rates brought on by electronic trading in recent years. About 95 percent of all retail options trading and 50 percent of institutional options trading is done electronically these days, Tobias said-much of that in single-stock options.

Tobias said he saw the writing on the wall with the transformation of the U.S. equity markets and the European derivatives markets into electronic marts. "We looked at this and said, 'How are we going to protect ourselves in this environment that is definitely going to get to the U.S. at one point?'" making firms like Englander "no longer the necessary execution venue."

The answer involves focusing on providing differentiated services to the buyside while still maintaining a floor-based execution business for the sellside. Tobias sees the buyside as offering a different opportunity than the sellside because the firm can offer "value-added services where we can ask for execution pricing. It's not a race to zero."

The centerpiece of Englander's plan for "execution pricing" is to offer prime brokerage services to small hedge funds-those with less than $250 million in assets under management-trading equities, options, futures and currencies. Begun in 2010, under the moniker "Prime Services," the broker recently rebranded it Managed Accounts & Prime Services to reflect a push into capital introduction. That involves matching investors with hedge funds.

For investors, MA&PS is an internally managed account solution, said MA&PS head Brett Yarkon. The platform provides them with real-time P&L, real-time risk, investment surveillance and compliance rules, advanced portfolio analytics and customized reporting, he said.