TD leaving options exchanges

Discussion in 'Options' started by freehouse, Apr 3, 2003.

  1. Toronto-Dominion Cuts Back
    On Option-Specialist Business


    NEW YORK -- Fifteen months after its splashy entrance, TD Bank Financial Group, also known as Toronto-Dominion Bank, is paring back the scope of its option-specialist business and will shutter its equity-option operation at the Pacific Exchange.

    The Toronto company's TD Securities unit will stop making markets as the Pacific Exchange specialist in more than 100 option classes including Amgen, Walt Disney, Johnson & Johnson, Qualcomm and Texas Instruments.

    The San Francisco exchange is working to reassign TD's specialist books, which account for about 10% of its option classes, to other "strong, capable candidates," said Dale Carlson, its vice president for corporate affairs.

    One firm that might step into TD's trading pit is Morgan Stanley, which is considering whether to accept some of TD's mandates, said people with knowledge of the matter. A Morgan Stanley spokeswoman declined to comment.

    Because TD has been shopping its specialist books to suitors, the pullback didn't surprise industry observers. But Morgan Stanley's interest created a buzz among traders since it doesn't make markets at any floor-based option exchanges; the Wall Street firm, however, is a specialist at the electronic International Securities Exchange. Morgan Stanley would also be moving against the recent exodus from the trading floor. Just last month, Goldman Sachs Group Inc. laid off 20% of its option specialist unit.

    Unlike firms that acquired a trading-floor presence at the market's peak, Morgan Stanley likely would scoop up TD's specialist books at low or no cost. This would allow it to make a cheap bet on the electronic future the Pacific Exchange is steering toward. The exchange is developing, and seeking regulatory approval for, a "remote access" platform called PCX Plus it hopes to launch by September. This will let members quote prices and make markets from places other than its exchange floor -- a more electronic approach firms like Morgan Stanley have grown comfortable with at the ISE.

    Entry cost also is a factor. The most recent seat sale at the ISE fetched $1.5 million, but at the Pacific, in fifth place among five exchanges in terms of market share, seat prices have plunged to $14,000 from $489,900 in the summer of 1999. "It's like buying a cheap call option" on the Pacific Exchange, one trader said. "It might pay off, and if it doesn't you don't lose much."

    The move would also allow Morgan Stanley to "internalize," or take the opposite side of some customer orders, a common practice among brokerage firms that believe they can make money trading against their own customers. Current rules require all listed options to trade at an exchange, so brokers must still route orders they want to fill to exchanges where they are exposed to possible price improvement.

    TD burst onto the option stage on a hopeful enough note. It announced on Christmas Eve 2001 it had acquired Letco and Stafford Trading, two major independent option firms. The price tag: about $280 million, plus as much as an additional $150 million if certain performance criteria are met. The acquisitions vaulted the newcomer into the No. 2 spot among option specialists, with about 16% of customer volume at U.S. exchanges.

    The timing was less than auspicious. Competition and the slumping market soon took their toll on profit margins, and volume slipped in 2002 after 10 straight years of record growth. Lucrative orders from individuals dried up.

    A year later, TD began shopping some of its specialist books. The word on the street was TD wanted to focus its resources, and pull back from regional exchanges like the Pacific and the Philadelphia Stock Exchange.

    A TD spokesman wouldn't discuss plans beyond the Pacific Exchange. "We conducted a full analysis and remained committed to the equity option business," the spokesman said. "But after reviewing our cost structure and revenue stream, it made sense to close our operations at the Pacific Exchange."

    Write to Kopin Tan at

    Updated March 27, 2003 8:10 p.m.
  2. TD Securities Continues Paring,
    Will Leave Philadelphia Market


    NEW YORK -- Continuing to pare its option business, TD Securities will pull out of the Philadelphia Stock Exchange following its exit last week from the Pacific Exchange (see article).

    Effective Friday, the unit of TD Bank Financial Group, also known as Toronto-Dominion Bank, will stop making markets as the Philadelphia Stock Exchange specialist in 112 option classes including Altria Group, Baker Hughes, MedImmune and PepsiCo.

    The exchange is reallocating TD's books to other specialists, and has found takers for 58 of those for now. The bulk of TD's specialist mandates are expected to be picked up at low or no costs by other large specialists at the exchange: Interactive Brokers' Timber Hill unit, Goldman Sachs Group's SLK-Hull Derivatives unit, Susquehanna International Group and Knight Trading's Knight Financial Products.

    Because these firms have been trying to limit their own exposure -- some have laid off traders and continue to tighten their belts -- they might in turn give up less-robustly traded options in their own rosters to take on TD's mandates.

    For instance, SLK-Hull is already the Pacific Exchange specialist in nine of 14 books it is expected to take over from TD; since a firm cannot be the specialist in the same option at more than one exchange, SLK-Hull may relinquish those overlapping books at the Pacific.

    The reshuffling after TD's departure also will leave the Philadelphia exchange, which is already dominated by a few large specialist firms, even more dependent on the fortunes and commitments of its largest trading firms.

    TD's move affects its nine-strong staff in Philadelphia. "We made the decision in light of the continuing slowdown in the equity option business," a TD spokesman said. TD still makes markets at larger option exchanges including the Chicago Board Options Exchange, the American Stock Exchange and the International Securities Exchange. Last week, TD shut its equity-option operation at the Pacific Exchange.

    Wednesday, call options traded robustly on renewed hopes that a concerted coalition attack against the Republican Guard just outside Baghdad could speed up the war in Iraq.

    The call buying was driven by the covering of short positions and by investors who see continued gains.

    General Electric's calls were active as the stock closed up 92 cents to $27.05. Its May 27.50 calls traded 15,023 contracts, compared with open interest of 4,408 contracts, and gained 35 cents to $1.05 at the Amex.

    Write to Kopin Tan at

    Updated April 3, 2003