From the December 2013 issue of Futures Magazine • Subscribe!

FCMs speak out

Some of our Top 50 brokers had a lot to say

At RCG, we’ve been ahead of the curve on much of this and have implemented on our own many of the changes now being codified in areas such as risk management, internal controls, conflicts of interest, training and disclosure.

 6.       Would merging the CFTC and SEC make your life easier, harder? Please explain.

SG: This topic has been around for at least the last 20 years, re-surfacing every few years. It’s a very complex question, and the devil is in the details. I just don’t view that as a question we can answer without knowing more about how the combined entity would be structured.

 7.       How is life with fewer (futures)/more (securities options) exchanges? How have exchange fees changed?

SG: Our focus is on the futures side, so we can’t speak to the growing number of securities options exchanges. There has certainly been consolidation in all aspects of financial services – from insurance firms, to banks, to investment banks, FCMs and exchanges. Exchange fees have risen, and when we view this through the prism of the customer/end-user, we’re concerned about what that will do over time to their ability to manage their risk in a cost-effective manner.

 8.       How has the futurization of swaps affected your business? Do you see it as a key area of growth?

SG: We limit our business to exchange-traded futures and futures options, and we do not participate in OTC markets so we don’t see OTC swaps (or SEFs) as a major growth opportunity for us. As more swaps begin trading on listed futures exchanges, I’m sure we will see some client interest so from that standpoint we see opportunities to participate.

 9.       Do you believe that high-frequency or algo traders have affected the markets? Do they affect your business? If so, how?

SG: This is a complex topic since there are numerous forms of algorithmic trading which do not fit neatly into one bucket.  I believe the real debate is focused on High Frequency Trading (HFT) and how it affects the markets. For example, many electronic trading strategies involve algorithms but are not in fact “High Frequency”.  These types of (non-HFT) trades contribute liquidity and arguably tighten bid/ask spreads in some markets.  Although we certainly have numerous clients who use algorithmic trading, HFT doesn’t represent a large portion of our business so we are somewhat neutral on the specific HFT debate.

10.   Can you share three trends you see now impacting the FCM community?


a)       SG: Globalization: Futures markets have increasingly become global, and we don’t see that trend subsiding. The world looks to the U.S. as a model for innovation in futures – products that are transparent, liquid and safe. As these markets outside of the U.S. continue to grow, the safety and integrity of the markets will strengthen too.

b)       Focus: In today’s markets, an FCM just can’t do everything. So you’d better figure out your core businesses and focus like a laser beam on those.

c)       Consolidation:  With the combination of increased costs in meeting new regulatory requirements and higher technology costs, we expect to see continued consolidation amongst FCMs.

 11.   Please add here any addition comments you would like to make. Thank you.

SG: Despite all that the FCM community has been through in the past couple of years, I remain very bullish on the futures industry generally and FCMs in particular. I remember in 1998, there were those writing the epitaphs of the Chicago futures exchanges. And then the exchanges reinvented themselves and became highly relevant once again. There is tremendous potential in the FCM model, and no one should underestimate our ability to innovate and reinvent ourselves as new challenges come our way.


Interview excerpts with : Don Roberts, Managing Director, Futures & Forex, ThinkorSwim by Ameritrade and Steve Quirk, EVP, ThinkorSwim, by TD Ameritrade (2013 ranking: #38)

Regarding the purchase of ThinkorSwim by TDAmeritrade:

SQ: Think about it, you’re not only changing the product mix, you’re changing the culture. I joke that in the early days when we would have an issue with routing, [TD] would say, ‘can you call us at 8 (am)?’ and I said ‘No, we need this fixed right now. There are people who trade 24/5, so you have to support them 24/5.’

We’re there hiccups, yes, but [TD was] intelligent in the way they let an environment and culture flourish, because that culture brings innovation. We are now 40% derivatives [revenues], but at the time of the acquisition, it was about 9%....[TD] saw this secular trend coming and they pounced on it and are being rewarded. So the last thing they want to do is take apart the bike and throw the pieces in driveway.

We’re not 180,000 clients, we’re 6 million. We get the bigger sandbox  with TD Ameritrade.

Clients want to do from one account, single account view.

DR: [Software] gave people who were solely active options traders  to be able to see the futures too.

1.       What are your thoughts on the Residual Interest debate, ie. the proposal to move from T+1 to just T? Please discuss a) if this is a realistic change, No  and 2) if not, why not? 

DR: Best thing when it came to enhanced customer protection rule was Commissioner Scott O’Malia, he made some great points, especially by asking did we study enough? The best thing they did was take an iterative approach. So if you came through the door with the sledge hammer, which they were going to do with residual interest, well, think about it, it would have forced a lot of people to pre-fund. A lot of these rules came out of MF Global and PFG]. But if Peregrine had asked you to prefund your account, he would had stole more. Instead of $200 million he would have walked out with $400 million. Corzine’s positions would have been exponentially larger. So the best thing  they did was take iterative [path].

SQ: if they would have mandated [T+0] it would have been carnage.

DR: And then prefunding would have hurt liquidity, and it sure it would have hurt the market. So now we have 12 months to get ready.

SQ: last thing you want is market movement based on mandated rules.

DR: Allowing for T+1 for a 30 month study period, see how affect markets and most importantly, liquidity, is a great idea. Did they kick the can down the road a little bit? Truth be told, they did. They left this for another commission to make a decision on.

SQ: At least they started it.

DR: Futures industry didn’t have all the hiccups, but got kicked in teeth twice and maybe it goes to thing that older rules haven’t been brought up to speed to modern times. And they’ve attempted to do it. There’s alot to be asked and answered. T+1  is at 6 pm, so when is that money in your hands counted as good money against the position? Because the Fed wire works in a batch file basis, what happens when the bank gets it at 1 pm and it’s in your name but you haven’t deposited to your account. ACH transfers go in at T+2, so when will ACH transfers count? Checks come into your office and you have to prepare them…does that money count?

D: Lot of the changes made up to this point changed the landscape quite a bit…like the chief compliance officer having to sign off, which came with Dodd Frank. These types of rules [made a difference overall]….It states firms have to take more accountability than previously.

2.  Do you see any contracts with exceptional growth potential? Where is  your main growth coming from: domestic or international? Has China/Asia   been a factor in your growth plans?

 SQ: Since 2008, equity volumes have been steadily declining …..for the past 10 years options volume has been a good secular trend, I think it’s 19% growth. So those have been growing at a healthy pace and we’ve been able to capitalize on that. Typically (TD) clients say they trade equities but then say [they] might want to write a covered call, so the progression is as a client becomes more able to trade those instruments, so wants to earn more income on my IBM so I write a covered call, or maybe something in the market scares me so I want a protective put. So once they’ve mastered that, they may want something with a shorter duration, which futures do, or they want to trade around the clock…we see a progression of these clients..once they get there, they say I have all these quivers sitting here , no matter how market moves, I’m equipped to handle.

 3.   Customer confidence continues to get hit with more incidents, such as AlphaMetrix. What actions have you taken to deal with client concerns? 


SQ: We surveyed our audience, it’s surprising how little they care…some bad eggs making poor decisions, and could live in any industry…as long as they trust us, and the security capital is guaranteed by us.

DR: We began trading on an omnibus basis…so we could give to the customers [confidence], we own your customers, our balance sheet. Not clearing other small firms.

4.  How is life with fewer (futures)/more (securities options) exchanges?  

SQ: “When you have 13 people competing against you, it drives the price down, and you don’t get that (with futures). “

We’ve told the futures exchanges ‘you  have an upside down model.’  In the retail (equity) side, the customer gets better treatment. First of all they have priority for orders to get filled. And transactional costs are lower…higher fees are for true institutional market  maker space….I’m not saying they should completely invert that, but to me (in futures) you’re paying 10 times as much as opposed to someone who is a professional…and HFTs get preferential treatment, and you want [retail] to come into your world? That’s a pretty big hurdle. The (futures exchanges) know this and they’ve made changes and are making changes.

5.  What are key trends?

DR: Continued consolidation with FCMS,  continuous low, non- interest rate is decimating their models. It’s a credit to a lot of them that they’ve hung on this far, right?

SQ: Flip side is it’s cleaning up the industry, must clean it to attract people [back] who have left.


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