Credit Lyonnais Securities is planning to become a market maker in listed and over-the-counter equity derivatives in single name U.S. options to generate revenue amid the current downturn in global equity markets. The French bank has hired Tim Youssef, director and senior equity derivatives trader at Merrill Lynch in New York, to spearhead the effort. Youssef started last Monday, officially kicking off the new initiative, said Christian Lengelle, managing director and head of equity derivatives at Credit Lyonnais in New York, to whom Youssef reports.
Lengelle said Credit Lyonnais has only traded equity derivatives in a proprietary capacity in the U.S., by buying and selling volatility, and is increasing its effort now as that formula has become less successful during the worsening bear market as flows have shrunk. "We need to find new ways of making money, by trading the derivatives themselves instead of correlation trades," he said, adding that to generate revenue in the current environment, "you have to trade volatility the good old-fashioned way: being a market maker." The firm has a market-making operation in Europe.
Rival equity derivatives professionals and headhunters said that one trader does not make an equity house, but by starting off small Credit Lyonnais is being prudent in trying to generate additional revenue and not become a major player. "Tim's a smart guy, but it's not a one-man deal: market-making requires critical mass, the margins are razor thin and it's extremely competitive," said one head of equity derivatives. But given the equity market's weakness he said now, if ever, is the time for a second-tier bank such as Credit Lyonnais to enter. "It's a great time to start something, because people are much more reasonable in terms of compensation." Lengelle declined to say how large a book Credit Lyonnais will seek to build up as a market maker.
For now, Credit Lyonnais will not hire additional marketers and will rely on its existing sales force that handles OTC options and structured products. He said the firm expects to get business from European clients who want exposure to U.S. underlyings as well as through Youssef's contacts from Merrill and by talking to more equity brokers. The current climate is also not conducive to taking on new personnel, but Lengelle stressed the firm is committed to the new business line and "if we need to expand and hire a specific sales force, we will do it."
At Merrill, Youssef was a flow trader and reported to Val Mihan, managing director and head of U.S. equity derivatives trading. He declined comment.