Options are a powerful asset class in their own right, as well as serving as an adjunct to long-only equity strategies. To an outsider, even one steeped in the markets, however, options can be intimidating, and may necessitate adding personnel who have derivatives expertise.
Chicago Board Options Exchange is keen on business initiatives that either create new proprietary products or grow the user base. Its recently announced plans to invest in Tradelegs falls into the second category.
“It really is a question of expanding our customer base, particularly among more active institutional users, some who are currently options users but not to the degree that they think they would like to had they more familiarity with it,” said John Deters, CBOE’s chief strategy officer and head of corporate initiatives. “And some are de novo users, for example investment companies whose charters have in the past kept them away from applying derivative strategies.”
A good number of investment companies are looking for efficient and inexpensive ways to develop option strategies for hedging risk. So from CBOE’s perspective, it's about growing the customer base and thereby growing trading volume.
The value of Tradelegs is in its effectiveness as a tool for distilling down the complex options market into options strategies that fit their specific views, said Deters.
He tells of one, middle-sized family office, staffed by ten investment professionals, that’s managing hundreds of millions of dollars of funds, and many of their positions are classic long-only equity positions.
“They have a fundamental view on those positions, but they struggle with how to best approach the derivatives market when they are trying to maximize expected returns and minimize the risk related to those views if they happen to be wrong,” said Deters. “You can approach it by hiring a team of options professionals who have experience in that field, which this particular family office had done in the past, and that didn't work out so well for them, given its cost constraints and other considerations. Or they could use a product like Tradelegs.”
He added, “We see Tradelegs as the only one out there in the market doing their service at this level of sophistication at a reasonable cost per year per log-in for an unlimited number of queries on an unlimited number of positions. From that perspective it's a pretty compelling solution for these types of investors.”