FinanceFeeds hosts Chicago’s finest: Multi-billion dollar listed derivatives leaders join us in the exchange capital of the world

The OTC derivatives sector of the retail electronic trading business has faced something of a crossroads during the past few months, that being the culmination of a lengthy period during which very similar product ranges have been offered by very similar companies who have been engaged in attracting the same client bases as 1231 firms which all use the MetaTrader 4 platform.

This has manifested itself in a lemming-like rush toward very risky initiatives such as becoming heavily involved in cryptocurrency trading to the point in some cases at which it has dominated all aspects of brokerage business, highlighting a desperation to ride a wave of populism which is unproven, often operated by low-rent entities and has zero recourse for customer or brokerage should something go awry, which, inevitably it will.

Dynamics such as this demonstrate that the difficulty in ascertaining a value proposition against competition which use the same off-the-shelf system is combined with a sense that any previous business model has been non-viable if firms are literally dropping everything to follow fads and whims.

Instead of this, building a business that attracts the very best clientele in the most stable markets globally is a very good option indeed, and now has never been a better time do so.

Customers of listed derivatives exchanges are often astute, have large portfolios and are used to trading various asset classes long term, thus are ideal clients for retail electronic trading firms.

As opposed to having an average deposit size of just $3000, a lifetime value of just six months and an average customer acquisition cost of between $1200 to $1500, combined with very little experience of the markets which means a huge amount of input is required to extend their term as a customer and avoiding ‘poaching’ by rival firms offering gimmicks, listed derivatives traders have an average deposit of $50,000, a customer lifetime value of over three years and are experienced, analytical and unlikely to jump ship at the latest glitzy offer from a small firm with no substance.

Whilst the potential customer base is indeed attractive, so is the stance being displayed by many of the world’s most respected and highly established derivatives exchanges in Chicago.

Chicago is the world center for electronically traded listed derivatives, and is home to IntercontinentalExchange (ICE), CME Group and a host of trading platforms that have been serving the professional trader for decades.

All of these firms are very interested in attracting a retail audience, and the marriage of MetaTrader 4 and MetaTrader 5 based brokerages in London, Sydney, Cyprus and beyond is a very good means of generating sustainability via a genuine multi-asset solution.

Chicago-based specialists such as CQG and DriveWealth have already developed solutions that connect the MetaTrader platform to derivatives exchanges in order to offer OTC products as well as listed derivatives on one platform, widely renowned market integration specialist oneZero having been instrumental in such a development.

Thus, the ability to gain this business exists, and the derivatives exchanges want retail business.

Deutsche Boerse bought 360T with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics.

In May last year, Deutsche Boerse began extensively concentrating on its ECN which enables access to additional liquidity and trading styles and adds another complimentary execution mechanism to the OTC FX trading offering. At the time, FinanceFeeds considered that the underlying credit facilitation models are highly scalable and innovative, which enable an easy and efficient participation in the 360T ECN.

The interest in the retail sector has been rising from within the listed derivatives giants recently, hence a correlation being drawn between them and the regulatory lobbying that appears to be taking place.

BATS Global Markets bought HotspotFX for $365 million a short while ago, and currently CME Group is looking at a project whereby they come up with a rolling spot contract which is a direct competitor to OTC derivatives firms.

Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million.

Another example of this is Hotspot FX, one of the world’s most renowned OTC FX ECNs, which was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September last year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities.

Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics. In any case there is a clear movement from exchanges into the OTC world, and perhaps somewhat ironically, ICE tried to buy FastMatch in July last year from its three shareholers, Credit Suisse, BNY Mellon and FXCM, for around $200 million to $250 million.

Exactly one years ago, we began witnessing Leucadia’s interest in ousting FXCM from FastMatch shareholding, having disposed of Drew Niv and William Ahdout last week in favor of two Leucadia directors. The ECN was eventually sold to Euronext, once again highlighting the interest by exchanges and clearing firms in OTC FX.

Companies with proprietary platforms and their own trading environments are already well established in multi-asset trading. Saxo Bank and Swissquote are examples of this, with the majority of Swissquote’s business being its multi-product range via direct connection to North American and Swiss exchanges.

In Chicago, massive opportunities to elevate your brokerage are ready, well organized, backed by the most reliable and long established giants in the electronic trading business, hence the move upwards toward the exchanges should be a priority for retail firms.

Last week, FinanceFeeds hosted some of the most senior figures in the listed derivatives sector in their Chicago homeland, the concensus being that now is the time to bring retail brokerages on board.

Held at the exclusive private venue R29 at the Franklin in West Adams Street, being in the same building as Cantor Fitzgerald’s global headquarters, the setting was absolutely appropriate.

Among the esteemed attendees were:

Rod Drown, Senior Managing Director, Cantor Exchange
Steve Petillo, Director, Straits Financial
Glenn Swanson, Founder, Daniels Trading/GAIN Capital Futures
Matt Giarelli, Business Development Manager, Vela
Ray Salvatore, Head of Trading, Eckhardt Trading
Brian Liston, President, SeedCX
Dave Schulz, Director, CBOE
Ed Boyle, CEO, Box Options Exchange
Mark Haraburda, CEO, BarChart
Mark Wator, Managing Director, BarChart
Ilan Azbel, CEO, Autochartist
Mike O’Callaghan, Managing Director of Clearing and Execution, Wedbush Securities
Joe O’Mara, Owner, DirectFX

Here is a montage of the evening’s event.