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.
“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.
Yarkon is in charge of risk management in the prime brokerage group, making sure the hedge funds aren’t taking on more risk than the broker or its custodian can handle. He joined Englander in the fall of 2009, after spending six years at a fund of managed accounts analyzing risk across the individual managed accounts, as well as overall fund of funds. He also performed manager due diligence.
“We have allocators who are clients looking for emerging managers, and they want to allocate to them via managed accounts. We give them the technology to do that. And we have hedge fund managers looking to raise capital,” Yarkon said. “MA&PS allows the allocators to have a look into what the managers are doing on a daily, weekly or monthly basis before they make an allocation.”
As part of Englander’s push into the prime brokerage space, it has made two key hires in the past six months. Fredrick Scuteri, who joined as chief operating officer of MA&PS in November 2012, was previously chief operating officer and head of prime brokerage services for Cuttone & Company. Brett Langbert, who joined as head of sales and distribution for MA&PS in March, was formerly head of prime brokerage sales for the Americas at UBS.
As part of the buildout of its prime brokerage offering, Englander has started offering an investment advisory service delivered via a joint venture with EAB Investment Group. EAB is a consultancy that helps managers use equity and index options to mitigate risk and enhance return.
“The services that EAB provides fit very nicely with the emerging manager demographic because they are looking to raise capital and need higher risk-adjusted returns to do so,” said Yarkon. “EAB specializes in lowering the volatility of returns while having minimal impact on upside participation.”
Edward Boll, managing partner at EAB, is a former senior portfolio manager for Goldman Sachs-Hull Derivatives. EAB has developed quantitative methods to identify what is cheap and expensive, meaning “when do you buy puts, when do you sell calls, how do you execute tail trades,” Boll said.
EAB uses F(t) Options, a third-party vendor that provides quantitative data that EAB uses to create its metrics, Boll said. “For example, we can take a portfolio of 250 names and break it down into the cheapest and most expensive strikes for each name…and pick the exact point on the curve where you want to buy.” Firms using the advisory service either pay a monthly fee if they choose to execute elsewhere or a brokerage fee for executions.
The electronification of options trading has not impacted commissions everywhere. Englander’s strategy for survival in the does involve sticking with a portion of its traditional business-the trading of index and ETF options, Tobias said.
The firm’s agency brokerage in Chicago specializes in trading options on the S&P 500 Index and the VIX Volatility Index. On the New York Amex, the firm is focused on ETF options.
Trading in these products is less rate-sensitive than it is for most options, “because there are very few people that have that specialty and have developed the trading relationships necessary for liquidity sourcing over the years,” Tobias said.
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