Facing a highly challenging business environment, Penson Worldwide announced Aug. 8 that it would aim to reverse its falling revenue and net loss in the second quarter through a series of initiatives, including the consolidation of its futures and securities subsidiaries, a move facilitated by Dodd-Frank.
Penson’s net revenues of $78.5 million were down 5% over the previous quarter, and the firm experienced a net loss from operations of $3.5 million, or $0.12 per share. Penson generates the bulk of its business clearing and executing trades for broker-dealers and future commission merchants (FCMs) catering to high-frequency trading firms.
By far the biggest portion of those losses stemmed from clearing and commission fees, which make up the bulk of Penson’s business. Those fees slipped 9%, to approximately $40 million in the second quarter, from nearly $44 million the previous quarter. That decline reflected the ongoing drop in trading volume across U.S. securities and exchange traded derivatives markets.
Penson saw average daily volume (ADV) for equities fall 10%, to 7.2 billion shares, while options ADV dropped 8% to 13.5 million contracts. The drop in futures ADV was less, at 2%, to 13.5 million contracts.
Penson CEO and co-founder, Phil Pendergraft, said in the earnings call that the firm has operated over the last few years under the assumptions that interest rates would rise and trading volumes would remain at least level. “Neither happened, and the outlook for the near-term is that the macro environment will continue to be challenging. And so we have to act accordingly,” he said.
Pendergragft later described six initiatives aimed at cutting costs or reducing operating losses. The first one to be realized, by the end of the third quarter, will be the consolidation of its futures commission merchant (FCM) and broker-dealer subsidiaries.
Asked by David Katz, a fixed-income analyst at J.P. Morgan, why Penson hadn’t pursued the integration earlier, Pendergraft described the change as facilitated by recent regulatory changes, including rules emerging from the Dodd-Frank Act passed last summer. “Some of the financial regulation over the last year has made it easier to do and more beneficial,” Pendergraft said, adding, “I would expect more firms to combine their operations in today’s environment.”
Kenneth Worthington, a J.P. Morgan equity analyst, asked whether the integration would result in any restrictions for clients. Pendergraft said it would result in no additional restrictions and noted that, “We’re in good company,” pointing out that J.P. Morgan had pursued a similar integration in the second quarter.
Mostly by integrating the infrastructures of the FCM and broker-dealer subsidiaries, Penson anticipates achieving $2 million in cost savings by the end of the third quarter. The firm forecasts $24 million in savings over the next year. That will stem partly from the sale of its U.K. clearing operations, which resulted in a $6 million second-quarter loss, and a broader outsourcing arrangement with trade-processor Broadridge, projected to result in savings of $8 million.
Pendergraft said Penson’s FCM and broker-dealer today each operate with their own infrastructures and capital, so combining them will allow the firm to free up approximately $30 million in regulatory capital. “The combination of these businesses should allow us to double [the size of] our future business without the need for additional regulatory capital,” Pendergraft said.
Penson Futures currently caters to 62 trading firms, a number that remained unchanged from the first quarter.