When it comes to pursuing active derivative clients, the big three self-directed retail firms, eTrade, TD Ameritrade and Charles Schwab, for the most part have bought rather than built that market exposure. The latest deal comes from E-Trade, which announced this past week it was to purchase OptionsHouse, and its parent, Aperture New Holdings, for $725 million in cash, the sale to be completed by the fourth quarter.
E-Trade is a bit late to this party. In 2011, Charles Schwab acquired OptionsXpress for $1 billion, and in 2009, TD Ameritrade picked up ThinkorSwim for $600 million, and now that derivatives piece accounts for almost half its business.
OptionsHouse, a Chicago-based firm that has 154,000 customer accounts with $3.6 billion in customer assets (which includes $1.4 billion in cash), executed 27,000 trades per day over a 12-month period, in which 63% were in options (vs. stocks). Revenue over the past year was $104 million, according to E-Trade. In 2014, OptionsHouse implemented its own growth when it merged with TradeMonster.
“This will provide us with an options trading pedigree that is significantly beyond what we enjoy today,” said Paul Idzik, E-Trade CEO, in a conference call. “This is a great platform. Upping our options capability had long been a goal of ours as we relinquished a strong industry position in 2009, giving way to a competitor who completed an acquisition of an option-centric platform. And while today we execute around 20% of the retail market’s options contracts and then nearly a quarter of our own customer trades are in options, our growth in the product leveled off some time ago.”
According to the Commodity Futures Trading Commission, E-Trade reported that at the end of May it had $61,181,903 in customer segregated funds, showing the size of its futures business. Aperture recently launched a futures commission merchant. According to the CFTC, by late May it had just over $1 million in customer segregated funds. OptionsHouse brings in “greatly enriched options capabilities,” Idzik said, adding, “We believe options to be an important component of an investor’s arsenal, and this deal will intensify our derivatives firepower.”
The U.S equity options market from 2001 to 2011 had a compounded annual growth rate of 19.3%, according to the Futures Industry Association, and has been just OK since then. In 2015, volume for U.S. equity options was 4.19 billion, down slightly from 2014. The key reason: lack of volatility. This year has seen a jump in volume when measured by CBOE’s June volume, which was up over 2015. As in any acquisition, the key will be incorporating the new firm. E*Trade CFO Mike Pizzi noted that there are two areas of redundancies in which they’ll be able to cut $49 million in total. “First clearing, OptionsHouse clears through a third party today and will eventually come on to our platform,” he explained. “As a self-clearing organization, we can harvest significant savings, creating favorable economics to us. Second, redundancies, including corporate overlap, digital, operations and marketing. Those will come from both sides as we work through the integration, but there are significant savings here across a broad array of areas.”
Although customers likely will see some added benefits to platforms, the biggest loser seems to be Apex Clearing, the third-party clearing firm. E-Trade also noted that it “expects the transaction to be relatively neutral to earning in 2017 and accretive in 2018, when full run-rate synergies of approximately $65 million annually are expected.”
— Check out Here’s Why Advisors Should at Least Consider Managed Futures on ThinkAdvisor.