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For E*TRADE, lucrative options trades at stake in OptionsHouse deal


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For E*TRADE, lucrative options trades at stake in OptionsHouse deal

Thousandsof lucrative new options trades and a boost to assets in the face of a key regulatorythreshold have brought E*TRADE FinancialCorp. back to dealmaking after more than six years without M&A.

The discountbroker agreed to acquireAperture New Holdings, the parent company of derivatives trading platform OptionsHouse,for $725 million. Options contracts are prized in the brokerage space, E*TRADE CEOPaul Idzik said during a conference call to discuss the deal, because commissionsthat options trades pay to brokers are higher than equities'.

The acquisitionis the discount broker's first since buyingCake Financial, a social networking site for professional investors, in 2010.

Withthe additional trades, E*TRADE's options market share would swell to 30% of allretail options trade volume. That would improve the broker's chances of regainingits status as a leading options broker, a position it held until 2009, when rivalTD Ameritrade Holding Corp.acquired , a trading platform Barron'srated best for options traders at the time. OptionsHouse received the same awardin 2016.

OptionsHousewould add about 17,000 options-specific daily average revenue trades, or DARTs;63% of the platform's 27,000 total DARTs for the 12 months ended June 30 were inoptions, according to the company's press release announcing the deal.

However,while options commissions are higher than those for equities at both companies,OptionsHouse charges lower fees for options than E*TRADE. The base fee for a singleOptionsHouse trade is $4.95, about half the $9.99 commission generated by an optionstrade at E*TRADE. A trade typically includes many individual contracts, each ofwhich generates another, smaller fee: 50 cents per contract at OptionsHouse, and75 cents per contract at E*TRADE.

Idziknoted during the call that OptionsHouse trades tend to include more contracts thanthose at E*TRADE, which brings their overall commission rate up to near E*TRADE'sown. OptionsHouse customers would continue to trade under their current pricingstructure, he added.

Leavinglegacy prices unchanged, at least at first, is common in brokerage M&A, JavierPaz, a senior analyst at Aite Group, said in an interview.

"Youdon't want to spook the clients you just acquired by saying you're going to jackup their fees," he explained. Paz said the existing clients' fees could eventuallyfall as brokers typically seen as "discount" are themselves undercut onprice.

Feesand commissions in trading brokerages have dropped to zero in some cases. New entrantshave relied on technology to cut down the costs of executing trades dramatically;Robinhood Financial LLCusers trade cash equities for free. It makes "perfect sense" for E*TRADEto acquire a broker that already features a lower pricing structure, Paz said.

"Thewriting is on the wall for lower transaction fees," he said. "I thinkthat E*TRADE understands that in time they will be squeezed."

Facingthe prospect of lower fees in the long run, the broker may be considering ways ofextracting more revenue from client relationships. On June 7, it announced a digitalinvesting platform, or robo-adviser, called Adaptive Portfolio. , E*TRADE's other majorcompetitor, has operated its robo-advisory business since March 2015.

OptionsHouseruns a small registered investment adviser service, Idzik noted during the mergercall. Responding to an analyst question about the RIA, Idzik said the company would"do a lot more work" on the business.

A companyspokesperson said the RIA business' metrics are not publicly disclosed.

The deal will also add a total of $3.6 billion in customer assets,including $1.4 billion in cash, to E*TRADE's balance sheet as the company preparesto cross the $50 billion thresholdand face higher regulatory costs. The company plans to hit that asset size in thefirst half of 2017, Idzik saidduring a July 21 earnings call.

The OptionsHouse assets make the move above $50 billion morecompelling, CLSA Americas analyst Robert Rutschow said in an interview. "Themore they can go above that [threshold] initially, the better off they'll be interms of defraying the costs," he said.

Above that level, E*TRADE would be subject to ComprehensiveCapital Analysis and Review, or CCAR, stress tests that dictate dividend and sharerepurchase levels, in addition to higher risk management and compliance expectations.Deposit assessment fees also would rise once it hits the threshold.