Live from Chicago: Tradovate President Ryan Hansen explains the revolutionization of the futures market
There is most certainly a key differentiating factor between FinTech startups which give rise to many new technological advancements in the fast-paced retail electronic trading sector and those in the highly established, multi-billion dollar institutional sector, where there is no margin for error, and capital risk is very high, yet the demand for innovation is […]
There is most certainly a key differentiating factor between FinTech startups which give rise to many new technological advancements in the fast-paced retail electronic trading sector and those in the highly established, multi-billion dollar institutional sector, where there is no margin for error, and capital risk is very high, yet the demand for innovation is now at a 15 year high.
For this reason, the very few innovators in the institutional futures sector are a world apart from the young entrepreneurs in many other sectors who launch their new inventions whilst in their early 20s from a garage with a group of developers.
Futures is somewhat different and the level of expertise required to revolutionize the way that futures are traded is immense, therefore here in Chicago, Illinois, home to the world’s most prominent futures exchange, prominent senior industry figure Ryan Hansen met with FinanceFeeds CEO Andrew Saks-McLeod in the poignant advent of the city’s FinTech Exchange 2016 event which takes place today, hosting America’s most technologically advanced institutional electronic trading and financial services companies.
Mr. Hansen’s provenance is unquestionable, having come from GAIN Capital where he was VP of Business Development at the company’s OEC futures division in Chicago for almost four years, a tenure which followed seven and a half years at PFGBest as Director of Vendor Integration.
Mr. Hansen graduated from Penn State University with a Bachelor of Science in Business before embarking on his institutional career in 2002.
Tradovate was founded by Rick Tomsic, who also founded Open E Cry, LLC in 2001 and has held various senior positions, including a Vice Presidency at Charles Schwab, Executive Vice Presidency at optionsXpress, and latterly Senior Vice Presidency at GAIN Capital.
Bringing futures into the hands of retail traders
Having embarked on the development of the new trading platform after joining Tradovate during its inaugural stages in 2015, Mr. Hansen explained that the firm actually went into live business yesterday.
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. This cloud based system is very new to futures” – Ryan Hansen, President, Tradovate.
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.”
“So far, we have had a great response from commission-free membership pricing. This is the very first introduction into this space, and the reception was very good indeed, with accounts having been opened on the first day.
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 could be also the 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. Starting out as a new company we developed a roadmap and mobile is a very large pillar of that focus as it is becoming more and more prominent for retail usage.”
“In futures we cannot be a market maker, as we are a brokerage, so we combined the platform and the brokerage. Futures is fragmented as there are up to four different parties that transact the trade, which are the introducing broker (IB), the FCM that holds funds, the independent software vendor (ISV) or technology platform that you subscribe to and execute trades, and a market data provider.”
“As far as the current device neutral focus is concerned, we have incorporated all potential hardware including a downloadable desktop platform for PC and Apple Mac, as well as an Android and iOS mobile application and web version” continued Mr. Hansen.
“We have consolidated the solution so that it incorporates both the technology platform and brokerage, as we wanted to make an experience that makes it easier to open an account and trade. On the FX side, this is normal among brokerages that use platforms such as MetaTrader 4, but our ethos is to do this with futures by making Tradovate a single touch point for the client” he said.
How much does it cost, and which venues is it connected to?
When asked about the capitalization of the platform, and how it is monetized, Mr. Hansen explained “We don’t charge a trade commission nor do we operate on a cost per million basis. Instead, we charge a monthly membership fee, rather like online portals such as Amazon Prime or Netflix.”
“There used to be a reason that this was done differently in the past, as used by firms that operate a commission model. The old way of doing business where a human touched every aspect of an order at multiple stages is no longer relevant, it went through a process in which a customer called a broker, then the broker called the trade desk, then the trade desk called the trading floor, the trading floor then transacted the order potentially with a market maker. The trade was then reported back. This required a lot of manual work” explained Mr. Hansen.
“With electronic trading, the costs created by the manual element are no longer the case.”
“For example, 1,000 contracts could be executed, or just 1 contract could be executed, and there would be no extra work for either scenario.
“Traditional brokers charge a commission on every single contract. What we are providing is a means by which we impact value the most for customers. We therefore charge a membership fee that covers the technology cost and the brokerage in one.”
In terms of connectivity to venues, Mr. Hansen confirmed that Tradovate is connected to CME Group (which includes CME, CBOT, NYMEX and COMEX), ICE US & Europe, and Eurex derivatives exchange.
Will this reopen the debate as to whether FX will go onto exchanges?
Last year, a lot of discussions took place regarding the possibility of FX going onto exchanges. Many industry executives considered this a possibility, however the cost of membership and clearing fees would run into millions of dollars per year, and render the whole aspect not viable for retail FX firms.
FinanceFeeds CEO Andrew Saks-McLeod considers that there may be a possibility of some of the exchange technology companies here in Chicago making dedicated virtual exchanges available purely for FX, in which prices could be centrally recorded for reporting purposes and no counterparty could be taken by a retail brokerage, such as a bilateral system operating at a fraction of the cost of a major electronic venue.
This has not happened as yet, however with Tradovate now providing a commission-free exchange-connected futures platform, the foray may well be here.
On this subject, Mr. Hansen said “There has been a pull from constituents that are central clearing components to adopt an exchange-traded methodology for retail electronic trading firms, however it is not certain whether it will pull through or not. It would have a negative impact on the FX brokers due to the costs if this were to happen.”
“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, President, Tradovate
“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. We would love 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.”
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.
Innovation is what Chicago’s leaders are all about
Here in Chicago, just a few hours before the FinWeek financial technology conference begins, it is fitting to see Tradovate’s innovative ethos.
Mr. Hansen said “Now that our new solution is live, we are offering trials, and have had a tremendous response so far. The mobile apps are now ready, with the Android application live already, and the iOS application being launched very soon, we have further innovations in the works.”
“”We are looking to hear feedback as to what features need to be further developed on the platform. We have been in the space for over 15 years, and have constantly collected data that helps us design what customers want” – Ryan Hansen, President, Tradovate.
“We want to hear from customers that will be able to tell us what they need from us that nobody else can do. They will reward us with their business and we will take the information and work to continue to improve the product” said Mr. Hansen.
Where will Tradovate be 1 year from now?
“The exclusive commission-free model has never been done before” explained Mr. Hansen. “We can measure how that has been received.”
Alpha and beta testing has been completed, and we got good reviews, so hopefully now that it is out in the mrket we will attract a great market share. The futures space has been depressed in the last 10 years, with low interest rates, and an increasing regulator environment that has pressured brokers” he said.
“Most have focused on surviving, and there has been tremendous consolidation. As a result, many have not had any chance to think about innovating. Looking around there is a lot of 10 to 15 year old technology, and the way business has been done is the same as it was many years ago. Looking outside futures, at products that are aimed at general consumers – everything has changed beyond recognition in that time frame.” This cannot be said for futures. We want to put this idea out there. After a year, we will have seen traction and hope to say the market validated this idea and has by that time said “yes we want it!”
Photograph: Andrew Saks-McLeod and Ryan Hansen discuss the new generation of futures trading technology in Chicago, Illinois.