Bringing New Customer Diversity Into the Futures Markets

Ever since the Chicago Board of Trade was established in 1848 and CME followed in 1898, Chicago has been known as a premier financial center. For generations, the markets and products that were created and built by Chicago traders drove innovation and Chicago rightly established itself as a center of excellence for “local” traders and the advanced risk management techniques that they developed.

But with the advent of electronic trading and the creation of new trading venues that go far beyond the floor-based trading pits, the question arises: where does the next generation of traders come from? I spoke to several companies that have asked this same question and are each addressing it in their business plans in different ways.

Reaching the trader of tomorrow

Trading Technologies (TT) has been one of the most successful ISVs as electronic trading grew over the past two decades, and they continue to innovate as the markets evolve. The new TT platform has embraced the cloud, which makes markets more accessible through multiple devices for all traders by reducing the cost of entry to new markets.

“The rise of electronic trading opened the market for many more participants and TT is working to take full advantage of the potential that access creates,” said Brian Mehta, Chief Marketing Officer at TT. “There are many more ways to trade markets, often on a 24/7 basis, and this requires new tools with maximum flexibility.”

Education is a big focus for TT and the firm’s efforts include a TT Campus Connect program and trading competitions such as the UChicago Midwest Trading Competition. With Campus Connect, TT not only donates its trading software to partner universities but also provides coaching, curriculum assistance, and career placement opportunities to the next generation of capital markets professionals. And with the Trading Competition, TT provides university-based teams with the tools and support to build automated trading strategies.

“The next generation of traders is tech savvy and looking for tools to manage all of the information that is available in the market today” said Mehta. “We give traders the access to the data that they need and the tools to help them build winning strategies.”

Creating a new model

No company is better utilizing the latest in communications and technology in order to educate and develop a new generation of traders than Tastytrade. They produce eight hours of live video programming every weekday and their on-air experts discuss real-time trading positions as a way to educate their viewers on how to trade.

Peter Mulmat, my old office mate and a long-time trader and member of the CME, hosts a daily one hour program devoted to options on futures.

“Our goal at Tastytrade is to make complicated things more understandable by giving real-world, real-time examples of the markets in action,” said Mulmat. “We believe that an investor can diversify through multiple occurrences, products, and asset classes. The key to learning is to trade small and trade often.”

Tastytrade isn’t in the business of making predictions or trade recommendations, instead focusing on education. They deliver that education with a focus on “doing” rather than delivering a canned lesson. Streaming video allows them to do so in real-time and the latest concepts in software design help them to put tools in traders’ hands that optimize their experience.

“Personally, I spent over 25 years in the world of direction trading,” said Mulmat, “and this approach has made me a better trader. At Tastytrade, there is a focus on options and using option strategies to reduce risk and scale down leverage of positions while keeping the liquidity of primary markets. We believe that there is a lot of room for growth in all of the markets through the use of these new tools and techniques.”

DIY Algos on the rise

The rise of electronic trading led to an explosion of algorithmic trading, first on the market making side and then on the customer side. Now, a group of do-it-yourself (DIY) algo platforms has popped up. While the 800 pound gorilla in the space is Quantopian, which made a splash in the summer of 2016 by announcing that famous hedge fund operator Steven A. Cohen pledged as much as $250 million to back traders, perhaps the most interesting firm is QuantConnect.

Where other DIY algo companies are more closed and opaque, QuantConnect is open and transparent. They offer free access to over 400 TB of data for equities, FX, futures, and options on a platform to develop your own algos.

“Our goal is to democratize the creation of trading algorithms,” according to Jared Broad, CEO of QuantConnect. “We offer free and subscription access to our platform and we encourage our community of over 31,000 quants to interact and collaborate. QuantConnect is very community focused.”

From the beginning, QuantConnect was different than most other DIY algo platforms. Many of the other platforms began as investment vehicles and none place as much emphasis on collaboration as QuantConnect does.

“In the world of algo platforms, we’re more like Linux than Windows: the system is open and flexible, not closed and static,” said Broad. “We were built by quants for quants, and the role of that community is very important to us. For example, we offer a range of asset classes and data resolutions that the community wants because we’re not seeking to fulfill an investment mandate and that’s unique.”

Developing traders the old-fashioned way — but with a new twist

In the days of floor trading, new traders could get their start by learning the ropes alongside seasoned traders and often began trading by getting financial backing from more established members. TopstepTrader* develops traders in much the same way that locals did on the floor in the past but also takes advantage of current technology to enhance and expand the experience.

Through TopstepTrader, traders are able to learn all-important lessons around risk management, in a simulated environment and are brought along at a steady and appropriate pace with the help of performance coaches. Importantly, successful traders have the opportunity to trade in a funded account.

“TopstepTrader is a unique trading environment and funding opportunity for anyone, anywhere,” according to Jay Rudman, the company’s CEO. “We help traders to develop a trading style and improve with rigorous one-on-one coaching, just like they did in the pits. And after completing our “Trading Combine” we back the most promising with funded accounts as well.”

TopstepTrader makes the most of modern media, offering streaming radio commentary, YouTube videos, and blogs. A recent addition is “The Weekly Kickoff,” a look at market conditions and trends with an eye toward the events and releases that will shape the week ahead.

“We take the best of what has worked in the past and improve upon it,” said Rudman. “TopstepTrader is a safe environment to work on and improve strategies, learn good risk management practices, and connect with other traders. We have traders in over 160 countries now and expect even more growth.”

Markets can’t live by massive algos alone

The rise of electronic trading has led to an increase in volume for futures markets and the efficiencies of scale have contributed to the emergence of algorithmic trading on a massive scale. However, a market needs to encourage and support as many different types of traders as possible in order to remain healthy and vibrant, even including access to algos for individuals. Just as the trading floors were once the training grounds for new traders, companies like Trading Technologies, Tastytrade, QuantConnect, and TopstepTrader are putting in the time and energy to encourage a new generation of participants to build and support markets through their active trading.

*Full disclosure: I sit on the Board of Advisors for TopstepTrader.