The View from Convergex: Reinvention, Options and Market Structure

Dec 1, 2016

It may come as a surprise that Convergex, the agency brokerage with headquarters in New York, has a hand in approximately 20 percent of all options routed through U.S. listed options exchanges and actually executes some 8 percent of daily options volume.  

The company has been reinventing itself over the last two-and-a-half years under the leadership of Eric Noll, who became CEO in the wake of a 2013 settlement. Convergex’s reputation took a hit when it admitted it had defrauded customers by inflating its fees. The firm settled criminal and civil charges to the tune of $151 million. Noll brought in new blood and refocused the business on its strengths — best execution and customer service. By maintaining those as its priorities, Convergex avoids conflicts of interest. It does not trade against customer order flow, does not offer investment banking and does not offer research, for example.

“I do quarterly review of my team here — town halls. And I always say the same two things. [Employees] are often very tired of hearing me say it: if we can’t be successful by being compliant and by doing it the right way, we should go do other things, we should be in another business. There’s no point in doing this unless you can do it the right way,” Noll said. “The second thing I say to them is if you can see the edge, you’re too close to it.”

Convergex has invested in a hybrid operation that combines electronic execution systems, a high touch desk that operates by phone and a floor brokerage at the CBOE. Some 25 percent of its executions are high touch on behalf of institutional clients, with the remaining 75 percent being electronic. Now, Convergex is pushing into the retail space as well.

“One of the things that we’ve always seen as we’re building out our options business here is really an inability to provide services to retail firms who typically route through what I will call consolidators. Those consolidators are both executing and routing and providing liquidity to the retail house,” Noll said. “That was an activity or business that we couldn’t penetrate or didn’t penetrate because really we were missing a piece of the puzzle. That piece of the puzzle was the liquidity provision itself, the market making side of that.”

To address that shortcoming, Convergex partnered with IMC Financial Markets in October to attempt to muscle in on retail order flow. Another issue on Noll’s mind is the newly launched tick-pilot program.

“It may be an overly dramatic statement in some ways, but nonetheless I think it’s true: [the tick pilot program] is probably the largest single change in market structure since Reg NMS,” Noll said. “What I mean when I say that is that it’s 1,200 securities which are moving from penny increments to nickels for the next two years of trading. That’s a lot of securities.”  

“Now, that actually has knock on effects in the options markets as well. Those same securities — if you are looking to access underlying liquidity as the hedge to your options trade or doing a buy write strategy — the ability to execute in those smaller cap names is certainly relevant to you. So I think [what’s] important as we go forward here is to see not only the effects on the equity market but [also on] the options market and how it behaves.”

That program is about six weeks old now, but more time will be needed to know the depth of its effects on the options market. Thus far for equities, it appears that quotes are more stable and spreads are widening in line with the goals behind the program.

Regardless of alterations to market structure, Convergex will continue to emphasize best execution.

“There is no other reason to do business with Convergex other than the quality of execution that we provide on a daily basis. That to me is the most important thing that we constantly have to keep coming back to,” Noll said. “People aren’t calling us up because they can get in the next IPO or the next capital markets deal. People aren’t calling us up because we have access to the best social media analysts. People are calling us up and giving us business because we’re earning it through best execution, service and innovation.”

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