CHICAGO (Chicago Tribune, Blue Sky Innovation) — Technology has already transformed financial trading, and emerging companies are still at work making options trading faster and more accessible than ever. With rising regulatory burdens, new technologies might make it safer to trade, too.
Options, largely traded on the Chicago Board Options Exchange, help traders secure the “option” to buy assets or commodities at future prices, which balances market risk by helping control prices overall.
You can already trade on apps. Is Google Glass next?
“Traders are in an arms race. They see algorithms as tools that allow for trading faster,” said Howard Charles, a Washington-based securities attorney. Algorithms allow trading in nanoseconds, faster than tickers can report real-time commodity prices. “Speed means volume, and volume means more money.”
Chicago has grown popular names like optionsXpress, which sold in 2011 to Charles Schwab for $1 billion. Trading Technologies, or TT, has become a leader in the space, working with 19 of the top 20 global futures brokers, the company boasts. Thinkorswim sold in 2009 to TD Ameritrade for more than $600 million.
But markets rebounding from recession grow rapidly, with new participants concerned with how to keep up, yet play it safe.
Burgeoning names competing in the industry include tradeMONSTER and OptionsHouse, selling to retail traders, and OptionsCity, selling to professional traders. Exchangery was grown in a Chicago incubator and sold to Maryland-based Mercaris in 2012 and TickIt Trading Systems sold to TT in 2010. Thinkorswim’s founder, Tom Sosnoff, created Dough, a trading platform educating individual investors.
Consumers have become wary amid trading scandals in the past few years. But instead of holding consumer funds, emerging options platforms give traders a program to trade their own money. They give traders without tech-development skills the ability to build algorithms and remain competitive.
Charles argues that new technology makes trading safer. Trades used to be made through person-to-person interactions, making it harder for regulators to pinpoint manipulation. But technology leaves trails, and regulators can follow them. Financial innovators say they work with compliance departments and exchanges to help banks and traders use technology efficiently, safely and for betterment of markets.
Evolution of new technology companies
“It’s one of the most challenging industries to build software for,” said OptionsCity CEO Hazem Dawani. “Everyone is trying to build the fastest, the best software to make more money.”
Three cofounders built OptionsCity in 2006 upon leaving larger financial firms. “We had to evolve as the market changed,” Dawani said. “We continued innovating by providing better tools by expanding to more markets and more exchanges, giving customers more automations.”
Firms were spending millions building software switching from floor trading to electronic. OptionsCity scrambled to deploy a swift, lucrative solution, helping traders efficiently navigate and analyze changing markets. It grew to include customized trading algorithms and trading among asset classes and among several exchanges globally.
OptionsCity recently opened offices in New York and London, which Dawani says could be an OptionsCity hub for European markets.
Rick Lane also saw a need for technological speed when he created TickIt in 2009. He made a visualization platform called the Algo Design Lab, allowing traders to design algorithms without having to write code.
Lane, who became TT’s chief technology officer, said new solutions are difficult to construct within 20 years of legacy code in older companies. New companies are able to start from scratch — though when TickIt merged into TT’s systems, he said, it took a bit longer than hoped.
But continuing to purchase new startup solutions allows TT to focus on strengths while letting others construct the “plumbing” to help TT systems evolve and remain easy to use for banks or proprietary traders.
Innovating platforms in risky environments
“Every generation of new trader, they’re becoming more and more comfortable with technology,” Lane said. He explained that “easy-to-use” products are important, but they also have to function across platforms.
It’s why TT, OptionsHouse and tradeMONSTER have been developing in the mobile and iPad space. Lane said he anticipates Google Glass apps will enable trades to be made throughout dinner or on vacation at faster speeds.
TradeMONSTER announced itself as the first to operate on HTML 5, a programming language considered relatively unstable. But chief technology officer Sanjib Sahoo said innovating along new, risky lines helps tradeMONSTER reach toward trading “anytime, anywhere.” Newer platforms become far more accessible to larger audiences.
The innovation bug brought tradeMONSTER more than 150 percent annual revenue growth in the last four years, Sahoo said, and has been ranked for the last four years in Barron’s “Best for Options Traders.” In 2013, Barron’s ranked it the No. 2 online brokerage in North America.
And a similar yearning to be easy-to-use and platform-friendly helped OptionsHouse to 25 percent year-over-year growth last year in customer base, which includes more-active traders. Also, Barron’s ranked OptionsHouse in “Best for Options” traders for the past five years, and StockBrokers.com ranked the company No. 1 in Options Trading in 2013.
Such growth and innovation come at a time when high-frequency traders dispute charges that their trading practices make markets too complex and can be manipulative.
“Technology and regulation will always maintain an intricate and interdependent relationship,” said Behzad Gohari, a Washington-based securities lawyer. “Each can serve as an enabler or a hindrance for the other. Each has served as a driver for change in the other.”
He added: “To vilify the derivatives industry based on a few bad actors is an overly simplistic, and unfair view of the industry as a whole.”
TT’s Lane agreed that there’s a place for technology to coincide with regulation. “Customers want to make sure they can properly control and govern the activity that occurs through our platform,” he said.
“They tend to step into any new software toes-first, and through a combination of education and support they learn to trust — and more importantly understand the implications of — most new technology.”