Fintech in Futures
Recent history hasn’t been kind to Futures Commission Merchants, as their numbers have dwindled by more than half since the global financial crisis amid tighter regulation and a mostly tepid business climate.
Simply put, the bar has been raised for futures brokers to continue to be futures brokers.
“Risk management has always been a key component in managing a successful FCM but now firms have to combine state-of-the-art technology, quantitative research and proactive risk platforms to stay ahead of the curve,” said Joe Signorelli, head of Wedbush Futures, a division of Wedbush Securities.
FCMs are exploiting financial technology for all it’s worth, with the aim of padding the bottom line by gaining efficiencies that more than offset the cost of the investment.
“We’re all trying to do more with less. No one can say they’ve been having incredible boom years,” said Matthew Rees, chief customer officer for R.J. O’Brien, the largest U.S. independent futures brokerage and clearing firm. “You need to continue to streamline the operation and find cost-saving opportunities, while still growing and moving your company forward. Technology plays a major role in that.”
Rees identified three primary areas in which Chicago-RJO is leveraging fintech: streamlining operations by consolidating trading platforms; improving account ‘onboarding’ workflow via automation; and developing custom software for clients’ trading, reporting and reconciliation, and middle- and back-office processes.
With regard to FCMs and financial services more broadly, “nothing occurs without some level of technology,” Rees said. “Even with manual execution methods such as on the floor, there’s a tremendous amount of technology that ensures that processes run appropriately and trades get where they need to go. Technology helps bring it to the next level.”
FCMs solicit and accept orders for future delivery of commodities related to the futures contract market. Aside from handling futures contract orders, they also extend credit to customers wishing to enter such positions.
There were 61 FCMs registered with the National Futures Association as of year-end 2015, down from 139 in 2008. The number has shrunk on largely on consolidation and straight-up closures; for example last year Jefferies sold its commodities brokerage, and just this past March, State Street said it would shutter its FCM business.
Regulation has been a headwind, and this is expected to continue as rule makers press ahead with new initiatives. In an April 12 speech to a Senate committee, U.S. Commodity Futures Trading Commission Chairman Timothy Massad cited enhancing cybersecurity protections and minimizing the risks of automated trading as priorities, both of which are relevant for FCMs.
“Cybersecurity is a giant issue,” said Tom Anderson, head of proprietary group services at Wedbush Futures. “I think if you pinged every clearing FCM in the business, you would probably have a 100% hit rate that they’ve all had some type of cybersecurity threat, whether that is somebody’s gotten into the system or somebody’s tried to do wiring to get in.”
Regarding automated trading, “we’re developing a lot of processes around better access to markets, with partners and technologies that are about getting more effective executions,” said Anderson, a 35-year veteran of the listed exchange derivatives business. “We have to be nimble and cost-effective. We have to create solutions and technologies that enable us to look like a bulge-bracket firm without bulge-bracket capital.”
One fintech application that isn’t on FCM desks currently, but may be sooner than expected, is blockchain. For now, there are lots of questions, and perhaps not as many answers.
“People talk about the concept of a cryptocurrency settlement process, but I don’t think people really know how it will ultimately apply to the futures business, and who it’s going to affect,” Anderson said. “How does the process alter the landscape for everybody on the food chain, from brokerage to exchange fees to clearing fees? Does it create a new safety net for the business?”
In speaking out for a bigger budget, the CFTC’s Massad made eminently clear that futures is a technology-driven business. In fact, portions of his remarks read as if they could have come from an FCM executive.
The regulator needs to better “receive, store, and analyze message data resulting from the growth in electronic and automated trading,” Massad said. “The CFTC also must be able to aggregate various types of data from multiple industry sources that have grown dramatically more complex. It is important that we bolster our core infrastructure to provide flexible, reliable, scalable, and high-performance services. This includes hardware, software and other equipment.”
“The days when the CFTC could conduct market surveillance by observing traders in floor pits are long gone,” Massad continued. “We are in an age of electronic, and mostly automated, trading, which requires an entirely new level of sophistication.”
Wedbush is working to optimize its strengths, which include technology unit Lime Brokerage, to thrive in the futures space over the long term. “We are building a portfolio of businesses by strategically planning with our front office, compliance, risk and technology in order to achieve efficiencies and an acceptable return on equity,” Signorelli said.
Featured image by Toh Kheng Ho/Dollar Photo Club
Bill Street, SSGA's head of EMEA investing, helps clients navigate low rates, negative yields and market volat...
'Big data' can make detecting network breaches simpler, if implemented correctly.
Legislation aims to divert some industry influence from exchanges to brokers.
The removal of protection for some trading venues spells complexity for Canadian market participants.
The move towards automated wealth management is unstoppable -- but it does have its limits.