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It’s the futures industry, Jim, but not as we know it.
There are two good reasons to arrive in Chicago early for the Futures Industry Association’s annual Expo. The first is you get to check out key party spots – those new restaurants that didn’t exist last year. Like The Girl & Goat on Randolph Street (its website says it “always keeps tables open for walk-ins, nomads, dreamers, and those of you who don’t like to plan”. Pretty much sums up the futures guys).
And this year the thing that’s really striking is how many new types of players there are here.
This industry has changed, completely changed, in the space of a few short years. Now, it is about data centres and colocation, about latency measurement and liquidity-seeking algos. It is no longer about whose exchange can offer the best electronic trading experience, or which one is launching whatever new product. I remember how exchanges would use press dinners to announce the launch of a new product, hoping that if we’d had enough to drink, we might be stupid enough to write it up.
When I was covering this industry out of Chicago for the FT (2002-05) FIA Expo was pretty much of interest only to the folks in the futures industry. The options guys started making an appearance later on, but the exhibitors were pretty much your household names: Eurex, Euronext-Liffe (as then was), CME, CBOT and assorted brokers and the odd technology provider like Trading Technologies or Patsystems.
Last year I walked the floor and was stunned by how the profile of exhibitors had changed. Most were companies I’d never heard of – like Latisys, a Colorado-based outfit that’s into colocation and data centre services. The clearing houses were there in force too, like LCH.Clearnet.
A look at the exhibitor list for this year’s Expo and a bunch of other names I’ve never heard of tumble out: ADVA Optical Networking, Anova Technologies, BTG Pactual, Derivix, Lightower Fibre Networks, RapiData and Tbricks. Some, no doubt, hoping to be the next Microsoft in the market structures space.
My prediction is that some will be. This industry, for too long brushed off as arcane, has become a truly mainstream financial and business story. Who would have guessed a year ago that that “60 Minutes”, the US documentary TV programme, would devote a segment to high-frequency trading? Yes, market structure geeks, your time has come.
But as I have said before in other contexts, the reason this is significant is that market structures is now a public policy issue as well. This isn’t just a case of a good story going viral. The infrastructure in which the investing public’s assets are traded is under unprecedented regulatory scrutiny; so is the infrastructure in which largely institutional and proprietary trading activity takes place – hence Dodd-Frank.
So far, so obvious perhaps. What will be interesting to see at this year’s FIA, however, is something less obvious. It will not be the latest dazzling developments in latency management, on data centres, on colocation.
It will be how all this jives with the fact that there is a huge push – thanks to regulation – on building infrastructures to make the financial system more transparent and safer (to put it in simple terms). There, the investment in risk management, in data feeds, in clearing connectivity, in OTC valuation services are probably going to (have to be) big. The trouble is, no-one really knows what to invest in exactly, and when, as long as the implementing rules for Dodd-Frank have yet to be clarified in the rulemaking process by the Securities and Exchange Commission and Commodity Futures Trading Commission. And that will take until July next year.
We also have the US midterm elections, which could put Republicans in charge of some of the committees that oversee the SEC and CFTC. That could change the rulemaking process quite considerably.
In the meantime, what are businesses in this industry to do? You have to make the investments to ensure you are regulatorily compliant. But what does that actually mean? No-one really knows. This theme cropped up at last week’s Sibos conference in Amsterdam. Expect it to do the same in Chicago this week.
