Growth in Options Trading Helps Brokers but Not Small Investors

As the stock market soars to new heights, E*Trade, Ameritrade and Charles Schwab are advertising the potential rewards of options, which give buyers the right to buy or sell stocks at predetermined prices in the future. Options, like their cousins, futures, have traditionally been the domain of Wall Street traders. But the brokerage firms say futures and options can be profitable for ordinary investors, too — a claim that, while true, does not square with many investors’ actual experience.

“We’re looking for newcomers who want to get serious,” Schwab says on its Web site.

While relatively little research has been done on the success ordinary investors have in trading options, analysis done for The New York Times by SigFig, a company that tracks 200,000 retail investors, showed that people who traded options last year received only about one-fifth the returns of people who did not trade options: 1.1 percent compared to 5.1 percent.

The brokerage firms do not release data about customers’ trading, and they are generally hesitant to detail the expansion of this business. But it has clearly been an area of growth. An analysis of scattered data from company filings and presentations indicates that derivatives trading, which includes options, has risen at all the major firms since the financial crisis of 2008, which left many Americans with big losses in their investment portfolios.

At Ameritrade, which has been the most aggressive, derivatives trades accounted for about 40 percent of all customer trades last year — more than double what it was just five years ago. A vast majority of those trades were in options.

The growth has been a big help for the online brokers at a time when stock trading has fallen. The commission on the average options trade is more than twice that on the average stock trade, according to TD Ameritrade’s former treasurer, Michael Chochon.

“We’re looking to continue to drive penetration in” options and futures, Ameritrade’s chief financial officer, Bill Gerber, said in a call with analysts in February.

But the results have been less of a clear victory for customers. Renaud Piccinini, who monitored customer accounts for Ameritrade before he left the company last year, said options could be used wisely in some circumstances. But he said he saw investors taking up options trading and “blowing up” on an almost daily basis. He said Ameritrade carefully tracked the risks its customers were taking but did not warn them until they were close to losing it all, if then.

“We knew that they were taking risky bets,” Mr. Piccinini said. “We knew inside the firm, but there was resistance to sharing that with the customer.”

Mr. Piccinini is now working with Mr. Chochon and two other former TD Ameritrade employees to create a program for retail investors, known as Prairie Smarts, that details the risks a prospective trade adds to a portfolio.

Steve Quirk, who oversees active traders at TD Ameritrade, said the former employees were criticizing the company to generate interest for their firm.

Mr. Quirk said TD Ameritrade gave investors a wide array of tools to gauge their risks, as well as significant education, before and after they started trading options.

“We hear from many, many clients that the more they understand about all the products that are available, the better equipped they are to deal with the market in any scenario,” Mr. Quirk said.

The companies began their big push into this area after the financial crisis, with the purchase of smaller brokerage houses that focused on options. At E*Trade, filings indicate that options trades rose to 24 percent of all trades last year from about 17 percent in 2010, and the total number of trades also increased.

Customers at all the brokers must take a number of steps before they are permitted to begin trading, and they must attest that they have read an official 186-page document laying out the risks of options. But almost anyone can go through this process. And the brokers have broadened the pool of potential customers by allowing investors to trade options in their retirement accounts.

E*Trade’s recent marketing material said: “Every investor should learn how options trading could benefit them.”

Article source: http://www.nytimes.com/2013/05/25/business/growth-in-options-trading-helps-brokers-but-not-small-investors.html?partner=rss&emc=rss