Ryan Hansen’s move to Rick Tomsic’s Tradovate after several years at GAIN Capital’s Open E Cry futures division formed the ground for his interest in decentralization and democratization of listed derivatives trading. Here is a full insight from Chicago, the global center of the futures industry
Chicago’s finely honed and world-leading listed derivatives and futures sector is most certainly the pinnacle of electronic trading at professional level, and as a result of its long established standing in serving exchange clearing members, proprietary trading companies and high net worth investors with vast portfolios across North America and internationally via partnerships with other global exchanges, the center of highly experienced talent.
This week, Ryan Hansen, one of Chicago’s astute leaders, has been appointed Managing Director of EverMarkets, responsible for Business Development.
EverMarkets is currently at startup stage, and Mr Hansen’s remit is to lead the onboarding of strategic partners and backers with regard to launching a new decentralized futures trading exchange.
EverMarkets considers itself a financial technology (fintech) entity within the electronic futures industry, largely due to its aspirations toward furthering the development of decentralization by using an open source solution that places emphasis on liquidity provision, distributed via a type of technology based on blockchain database development.
The ideology behind this is to reduce the cost of trading on exchange, as well as utilize microstructures to improve execution quality.
Challenging the status quo in Chicago is a very difficult task, as the listed derivatives giants in the Mid West’s most important commercial center are widely recognized as being the most transparent and highly organized trading venues in the world, and their level of sophistication in terms of market connectivity and execution are unrivaled.
Indeed, many large retail OTC firms have been looking extensively at methods of connecting to the exchanges recently in order to access this level of prestige as well as attract good quality futures trading customers, just in the same way that the exchanges see tremendous value in connecting the retail OTC firms to provide retail traders with a multi asset product range so that they can bring on board a vast global retail audience.
EverMarkets considers that as a result of there being just a few exchange operators and the existence of strong barriers to entry, it is no surprise that futures exchanges are extremely profitable.
In 2016, the CME had revenues of $3.6 billion and a net profit margin of 43%, and ICE enjoyed inlays of $4.5 billion and profits of 35% during the same year.
EverMarkets in its quest to provide decentralized market access focuses on the cost of membership and clearing, stating that the overwhelming majority— 85% – of the CME’s revenue originated from transaction and clearing fees, paid by both buyers and sellers on a per contract basis.
One problem is inherent to its architecture: since centralized exchanges typically have a singular matching engine which processes orders in time-priority, traders are advantaged by being as physically proximate as possible.
This has led to rampant co-location, or the practice of installing one’s trading algorithm in the same building—or in some cases, even in the same networking equipment—as the exchange’s matching engine, at significant cost. Trading firms also spend heavily for access to high speed communication services, such as microwave lines, to funnel data from one matching engine to another as quickly as possible.
Firms employing these strategies recoup their investments by being able to make a large number of marginally profitable trades with high certainty.
For example, when latency-sensitive traders sense that a large, slow buy order is starting to execute, they will begin buying, incrementally pushing the price up.
By the time the large order is nearing completion, the latency sensitive firm will be able to liquidate by selling to the large order at a higher price. Since a co-located firm is able to be dart in and out of positions quickly, strategies like this can be very lucrative.
EverMarkets seeks to operate considerably differently, proposed system works through the issuance of the EverMarkets token (EVR) through the Ethereum platform. EVR is used for collateral, leverage, settlement of contracts, and the administration of its trading system.
EVR holders can choose to facilitate two important third-party “administrator” roles which include acting as a matching engine which pairs buyers and sellers, and providing margin.
This is quite a challenge, and being a startup with a new methodology that seeks to decentalize the operation of futures exchanges within a highly established corporate environment of well respected giants which are responsible for the vast majority of all global listed derivatives order execution.
Mr Hansen comes to EverMarkets with substantial experience, having joined the futures industry at GAIN Capital’s Open E Cry (OEC) division in 2010 from PFGBest, where he was Director of Vendor Integration for seven years between 2003 and PFGBest’s infamous demise in 2010. He has also held a Vice Presidency at Charles Schwab, and an Executive Vice Presidency at optionsXpress.
Joining GAIN Capital’s OEC division put Mr Hansen alongside renowned futures industry leader Rick Tomsic who had founded Open E Cry in 2001, whom he would join in 2014 at Mr Tomsic’s own new venture, Tradovate.
At Tradovate, Mr Hansen was President. He met with FinanceFeeds in Chicago recently, shortly after having embarked on the development of the new trading platform after joining Tradovate during its inaugural stages in 2015.
With regard to modernization within the futures sector, Mr. Hansen explained that “The cloud based aspect is certainly one of the things we are bringing to the market, especially in the futures space where this is somewhat new.”
“Windows based, downloadable technology is still prominent throughout the industry, however cloud based systems are very new to futures” – Ryan Hansen
In terms of how the exchange-traded futures market can now be placed within the hands of retail traders in any location, Mr. Hansen explained “The device neutral and platform neutral aspect is something we are bringing to the market.”
“Essentially, the platform itself is not being labeled as retail or professional, as we are not making that distinction and can provide it to all participants. We spent a lot of time building in key aspects of futures platforms, such as the depth of market (DOM) order ticket, so that traders can see the order book to place trades, in the form of a price ladder” said Mr. Hansen.
Mr. Hansen explained that Tradovate’s ethos is focused on an attempt to make things simple and easy to use. “This sounds remedial but in the futures space technological disruption among platform vendors and brokers is not the norm. This is usually very much a traditional Windows XP experience. We want to look at the design principles and make things easy to use for all users, whether they are new traders or professional traders.”
In Chicago, Mr. Hansen met with FinanceFeeds and explained ““Futures trading on a retail electronic platform via exchanges is sustainable as the average deposit in futures is much higher than that of the average FX trader” said Mr. Hansen.
“This is because with futures contracts there is not a smaller sized component like there is in FX with its mini or micro lots. The margin requirements therefore necessitate a higher account size.”
“I am of the belief that exchanges provide a valuable service. Does it warrant what they charge? That is an interesting question. We need to hear more from traders on this. Currently we do hear a lot from traders on this subject, and in doing so we hear both sides of this, from the customers and the exchanges with regard to fees” he said.
Attractive to OTC traders due to spreads and ability to view limit order book on exchanges
This addresses the brokerage side of the equation which is typically over half the fees that would incur on transaction cost is now eliminated. The membership fee provides a fixed cost for unlimited, commission-free transactions per month.
“We want to reduce the cost for active traders” – Ryan Hansen
“As far as the existing market is concerned, we want to provide active futures traders a means by which they can reduce cost” said Mr. Hansen.
“OTC FX trading is quite different. Exchanges like the CME have FX futures, which we offer in full and mini and micro lot sizes. It would be great to have people who currently operate in the OTC space that maybe want to trade on exchanges. In America, futures trading is very popular popular and we can extend this to a wide audience.”
As the FX market continues to fragment, and higher regulatory costs for bilateral trades start to bite, exchanges are no doubt eyeing an opportunity to get closer to the FX market by offering capital efficient client clearing/counter-party risk mitigation solutions to the OTC markets.Compared to OTC futures contracts, in particular CFDs, the spread is tighter on exchange-traded futures, and also the trader can see the limit order book because some exchanges provide depth of market up to 20 price levels. CFDs, being OTC, have wider spread and the trader cannot see the depth of market.
It would therefore make sense for ICE as a vertically integrated exchange with a strong clearing capability, to look to enhance their position by buying a relatively small but growing FX platform like FastMatch.
Life in the old desktop yet?
Developers of platform technology for the retail FX industry has committed a great deal of attention to mobile-first, or mobile-led technology, spurring discussions that the desktop platform may become secondary, or indeed obsolete as time goes by.
With the futures sector, things have been somewhat different, largely due to the very institutional nature of that element of electronic trading. With new technology such as that offered by Tradovate, however, this may well have been another step toward mobile-first futures platforms.
When asked about this, Mr. Hansen said “I am not sure if the new developments in electronic futures trading will completely eliminate the desktop, that is a very bold statement to make, but we have seen a lot more mobile usage. Whilst at Tradovate, starting out as a new company we developed a roadmap and mobile was a very large pillar of that focus as it is becoming more and more prominent for retail usage.”
Indeed, Mr Hansen’s remit with regard to working at senior level with companies that intend to democratize futures trading and bring it within the fiscal reach of retail traders stands in good synergy with his move to EverMarkets.
Image: Andrew Saks-McLeod with Ryan Hansen in Chicago, Illinois