The ‘edge’ in trading has shifted. Fewer firms are able to survive and flourish as specialists in one contract or asset class, pushing many smaller, regional trading shops to join forces and pool resources to expand into new markets.
“The cost of appropriating alpha has gone up,” said Steve Woodyatt, chief executive of Object Trading, which provides direct market access (DMA) infrastructure. “Traditional (arbitrage) shops are aggregating and merging.”
Forging partnerships to share costs associated with expansion into new markets entails utilizing managed products to mitigate risk throughout the trade cycle and deploying margin capital most effectively, Woodyatt told Markets Media in an interview near Object Trading’s Chicago office. This can result in speedier market access and reduced overhead for connectivity and data feeds to exchanges and other trading venues, he said.
Chicago-based traders, once focused on markets in their home city, are branching out beyond latency and single instruments, according to Ian Grieves, Object Trading’s managing director for the Americas.
“We’ve seen smaller firms here banding to increase their reach,” Grieves said. “They get together and pool capital when they need more leverage and ability to access new markets and destinations.”
The trend of traders and brokers expanding into more regions and asset classes is helping Object grow its DMA customer base. “We’re seeing futures commission merchants and broker-dealers choosing geographies they want to offer to clients for expansion,” Woodyatt said. “That gives their customers more places to access through the same infrastructure.”
For example, R.J. O’Brien, prominent around Chicago and the industry’s longest-running FCM, added human capital and investment services in Asia and Europe this year as part of an initiative to broaden its institutional client base.
The collaborative lines are beginning to blur between top-tier banks, expansion-minded mid-tier specialists, and buy- side participants seeing increased demand for capital and risk efficiencies, Woodyatt said.
Large sell-side firms must scale and respond quickly; mid-sized trading firms are expanding and diversifying their offerings. Specialized broker-dealers want best execution and other value-add services to manage algorithmic strategies, he added.
Once the September 9 mandate is reached for centrally cleared over-the-counter derivatives trading in the U.S., firms’ capital resource allocations will shift more toward execution spending.
“This gives a rosier outlook to execution-desk business,” Woodyatt said. “A lot of firms are banking on that, but they are holding off on making final decision to see which swap execution facilities (SEF) will surface.”
