Risk Perception

By Theresa Carey  |  Posted 2004-08-24 Print this article Print

Both the fixed return option and the single stock future offer economically viable alternatives to the equity markets for both the educated retail and institutional investor. Given the exotic nature of these products, it is incumbent upon the providers—primarily exchanges and online brokers—to develop effective investor-education programs. A major barrier to the slow acceptance of SSFs is confusion on the part of the average investor. SSFs appear to be very risky, which causes the average retail investor to back away from the monitor and put down the mouse. The TowerGroup estimates that active options traders currently account for just 5.2 percent of all online traders. There are about 1 million customers of online brokers who have been approved for options trading but are sitting on the sidelines. Those who are actively trading futures number a mere 0.6 percent of individuals with online accounts.
The TowerGroup states, "Examining the market for the SSF, or in this case the market for retail futures trading in general, one concludes again that this space remains unpenetrated and plagued by the same stigmas as the options market, namely that it is a speculators market and that the associated risk is outside of the online investors purview."
Click here to read about the results of a CIO pay survey. Developing the technological infrastructure to support these exotic products, according to the TowerGroup, differs greatly. There may be an advantage in accepting the FROs, since it requires little infrastructure build or change requirements by online brokers who cater to the active trader. But an online broker will have to develop specific presentation layers within its customer portals and broker desktops. In part to distinguish the FRO marketplace from the traditional options marketplace, online brokers will need to create specific order entry screens and support tools that the consumer can utilize for the FRO. Market structure for the FRO will be very close to the structure for todays options. The American Stock Exchange will be the host and market center for the FRO. As they do for traditional options, designated exchange members will provide liquidity for FROs and assist in maintaining orderly markets. From the exchanges perspective, there will be little in the way of technological infrastructure change necessary; most of the cost for development of the FRO will be associated with marketing and administrative requirements. TowerGroup estimates that Amex will spend less than $500,000 to bring the FRO to market, as opposed to the tens of millions of dollars the exchanges spent to bring SSFs to market. The market-sizing data shows that there is room for growth in the retail options arena, which can be extended to FROs. With almost 1 million "options approved" online customers waiting on the sidelines, online brokers have a good place to start pumping up their DARTs. Check out eWEEK.coms Finance Center at http://finance.eweek.com for the latest news, views and analysis on financial applications and services for the enterprise and small businesses.

Theresa is the Editor of CIOInsight.com's Finance Industry Center. She's been writing about financial technology issues since 1990 for a wide variety of publications, including PC Magazine, Newsweek, Fortune, and Fortune Small Business. She is also a Contributing Editor to Barron's and writes their 'Electronic Investor' column.

Theresa received a B.A. from the University of California, Berkeley, and a M.S. from the University of Santa Clara. She also has a private pilot's license. When she's not at her computer, she coaches a local high school volleyball team, plays softball and volleyball, and takes part in many Cal Alumni Band events. She lives in Northern California.


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