One of the more depressing trends in the futures industry during recent years has been the decline in futures commission merchants (FCM). While in the early part of this century the decline was more about consolidation and building economies of scale, in more recent years it has been about the ability to earn profits from futures brokerage with higher compliance and regulatory costs in an era of zero interest rates.
As of the Commodity Futures Trading Commission’s March FCM Data report, there were 70 FCMs listed. That is one more than the 69 listed the last time we presented our yearly Top Brokers feature (see “Top 30 Brokers: Mean, lean and ready for what comes next,” January 2016) highlighting the FCM world, but it did not include OptionsHouse, which has since expanded into futures and launched its FCM in April. We noted that the number of FCMs had shrunk from more than 180 in 2004 to its current sad state.
We spoke to Rick Tomsic, CEO of Tradovate, an innovative new firm with plans to launch an FCM in 2016. Tradovate’s FCM is registered and approved but launched in April as an introducing broker.
I’m not sure two new firms can be labeled a trend but the entry of OptionsHouse and Tradovate is a positive development for a sector that has been bereft of growth. Both firms target self-directed active traders and offer unique options.
Tradovate’s value proposition is centered on cloud-based technology that offers traders one place to fill their needs along with an innovative pricing model that will save active traders money over the traditional commission model.
“We felt like the fragmentation of most offerings today where you go to a software provider, then find a brokerage, then find an FCM — and each one of those firms have to make money — ultimately adds cost to the end users,” says Tradovate President Ryan Hansen. “Not only can we reduce that cost but also [improve] the customer experience. “
Tradovate offers an all-in monthly fee. Traders are charged one fee for unlimited trading between $39 and $139. The more expensive option includes exchange data and the ability to trade multiple accounts.
Hansen says, “Unlike a traditional broker or FCM the thing that matters to their profitability is number of trades, and in our model the customer is equal, whether they trade a lot or a little they are still considered to have the same value in our firm.”
Tomsic, who also founded Open E Cry, says the early response to its fee model has been very positive and believes that now — perhaps at the bottom of the FCM market — is a great time to launch.
“We didn’t build Tradovate and make the significant investment that we have for this to be small,” Tomsic says. “What we have set out to do is build a best-in-class trading platform, experience and cost structure. Hopefully, along the way we can chew into the market share of like products.”
Tomsic also hopes to bring new people to futures.
That is the goal of OptionsHouse, which has been serving equity and equity options traders for years. Many of those traders also trade futures or would like to.
“We have a very sophisticated and active equity and options trading base,” says OptionsHouse SVP of Brokerage Joe Corso. “We know that at least 10% of that active trader base also trades futures and options on futures somewhere.”
In addition to existing customers Corso sees growth on the futures side and a willingness of traditional equity traders to expand their trading. “We see an uptick in the volumes over there; the timing is perfect for us,” Corso adds.
Their value proposition is tied into offering a one-stop shop for active traders across asset classes.
“It definitely rounds out our offering,” says Stephen Claussen, chief investment strategist at OptionsHouse. “A lot of our super active customers trade futures somewhere else. Now to have one platform, one amount of capital — yeah, it is two different accounts, but to the customer it will appear as one account. It makes it much cleaner for them to do it in one spot.”
“The reason we went down that path is security,” Corso says. “We are going to sweep all of those excess funds back into an equity account, you now have FDIC and SIPC protection. We’ve all seen the fallout from [MF Global]; we want to put as much protection around our customers and their assets as possible.”
Start-ups have a tough road regardless of the industry and are particularly challenged in the futures brokerage world of 2016. There are no guarantees, but it is nice to be writing about growth in the space rather than contraction.