freehouse, The reason there is no real linkage is because the exchanges really don't want it. Your assumption of being a member at all 5 exchanges causing the high level of commissions is not accurate. There are a lot of firms that only hold one membership. In addition there are locals, with a membership and a clerk, trading their own account, no customer business, incurring the same overhead. The hard charges to clear a customer option contract are around $.20 - $.30 cents, not accounting for all the rebates. The reason retail option commissions are so high is because the industry wants them there, and there is no real pressure to push them down.
Yes, but the locals trade for their own account. Thus, they make money trading against customer order flow. Firms that execute retail order flow will have the same overhead as a local. However, if the retail customer doesn't trade, they keep on eating expenses. If an option contract trades on 5 exchanges and the NBBO is 1.40 (CBOE) by 1.50 (Philly) and you have a customer who wants to sell a 20 lot against the 1.40 bid and you have only a membership on the AMEX well you may get an execution. Then again, maybe you won't and you will lock the market. Thus, any retail firm who doesn't have memberships on all 5 options exchanges will have to use the services of an exchange member such as Chicago Corp or Knight Execution Partners. Option commission costs have come down since options became multiply listed. That is a fact.
In order for the local to make money from the order flow, the broker is bringing in the order, both making money, moot point. Using the services of an executing broker, at an exchange you do not have a membership at has been going on forever. You don't need to clear and execute the same firm. We have been lucky since August of '99 in bringing down our commissions on a negotiated basis; however I don't recall any great reductions on the retail front; IB is still @ $1.95 retail. The point was hard costs on options is about $.20 versus retail of $1.95, stocks have a costs of about $.003 versus retail of $.005 - $.01, futures about $1.16 versus retail of $2.40. Figure out the ratios. Same infrastructure, why the difference? IB, the favorite child on this board, makes most of it's money on the proprietary side of their parent Timber Hill. Their infrastructure, and most of their main competitors, was set-up for that purpose, long before they started doing retail accounts; so where is there capital outlay? In addition your seat prices are dramatically overstated, and your clerk costs are understated by a factor of @ least two.
good points. so the $1.95 being unconditionally reduced to $1 - $1.25 is really reasonable. one contract one buck , the parity. 25% surcharge is acceptable with all factors taken into consideration. But no more.
Freehouse, You are correct, you did say that, but most of the audience doesn't read the fine print. Current seat prices are: EQUITY LEASE (month) CBOE $250,000 $1,400 AMEX $290,000 $1,800 PHLX $80,000 ??? PCX $35,000 ??? ISE $1,600.000 (CMM) $500 (EAM) The clerks I know @ the CBOE are making $75K - $100K.
fees: you guys are leaving out a few things: 1. Exercise/assignement costs: IB doesn't charge anything but clearing house pass through fees; 2. volume: stock volume is measured in the millions, option volume is measured in the thousands. (if/when IB can measure option volume with the measure, i'm sure fees will be lowered) The greater the volume, the better the economies of scale. 3. costs of infrastructure - this doesn't only include hardware and multiple high speed lines to all the exchanges. It also includes the cost of maintaining an accurate database of the hundreds of thousands of strikes which change on a daily basis 4. expiration: a pain to deal with - there are stock loan issues as well. see above: IB doesn't charge for the conversion into stock or short stock 5. corporate actions (splits, takeovers, etc) often need to be dealed with on a manual basis 6. leverage/risk: more leverage is afforded to options which gets factored into the price 7. regulatory costs are higher (need to conform with equity and option exchange requirements), also need to have better risk management systems 8. brokers need to charge a fee that is economically viable 9. IB is still the cheapest in town. Most firms charge a minimum ticket charge of 15 bucks or more. just my two cents.
Def, 1. True, charge a little for the exercise, out of 300,000 contracts a month we exercise maybe 200 times; 2. True, get someone to fill on their posted quotes and we will help you pick up the volume; 3. You already have them, we keep up with the changes in a little ten man shop, all it takes is a subscription to the OCC update service @ about $1,000 month; we used to trade @ IB, you guys do a terrible job of keeping up; 4. True, but I have never paid for the conversion; 5. True, but we deal with them, and so does TH or they could not arb the bastard deliverables; 6. False, more leverage in futures, see ratio on previous post; 7. True, the option exchanges are crazy, the should try trading better instead of regulating to stop upstairs trading; 8. True, but see ratio above, that is the issue; 9. Maybe on pure retail.
I was referring in reference to stocks on the leverage. I was talking in general terms for all brokerages and was targeting the comments for retail - not professional non-cleared business (which is cheaper at IB as well). re database: IB actually has it pretty well automated now and things are quite good (eg. expiration was yesterday in HK and Australia and all our strikes have been added without error). Nevertheless, this is a cost. Volume/directX: The BOX may help, lets hope so.
What firms at the CBOE are paying clerks 100K? Arb clerks, dpm clerks, coffee and donut clerks? Actually what firms at any options exchange in the US are paying clerks 60K?