This year's FIA Expo featured a special section devoted to presenting 18 new and emerging companies whose innovative products and services hold great promise for the derivatives markets. This article profiles each one of these 18 companies, describing how they are leveraging advanced technologies such as cloud computing, artificial intelligence and distributed ledgers to bring dynamic new solutions for trading, clearing, risk management, data processing and regulatory compliance.
New Tools for Traders
- Cloud9 Technologies
- MayStreet LLC
- Volar Technologies
New Solutions for Trade Processing and Risk Management
New Trading Venues and Products
Innovators Pavilion, the second that the FIA has hosted at its annual Expo in Chicago, featured 18 companies founded in the last five years that have developed innovative products and services that can benefit the derivatives markets. Some of these companies are still at a very early stage of development and are working with partners such as banks and exchanges to tailor their products to the derivatives markets. Others are in full production mode, with tens of thousands of customers and financial backing from prominent financial institutions. Most are focused on applications related to trading, but the group also includes companies that are seeking to bring more efficiency to the operational side of the business.
While the range of solutions is extremely diverse, the common theme is innovation. Several of these companies have invented a completely new solution and have filed for patents on their innovation. In other cases, the companies are applying existing technologies in a novel way, or delivering an existing service at a dramatically lower cost. Perhaps most exciting, many of these companies are lowering the barriers to entry by diffusing advanced technologies to a wider range of people. Companies like MayStreet and Volar Technologies are commercializing cutting-edge technologies typically found only at the most sophisticated firms, and companies like QuantConnect and Top- StepTrader are helping individual traders build their own trading algorithms, improve their trading skills, and find financial support for their trading strategies.
Advanced Charting Tools Designed for the Web
As the computer language underlying the Internet continues to advance, new opportunities are opening up for displaying data. That's where ChartIQ comes in. The four-year-old company has built a library of graphics in the latest generation of hypertext markup language, HTML 5, giving developers an easier way to create great charts on the desktop, in a web browser, on a tablet, or on a smartphone. Customers can add as many objects to their charts as they like without suffering from any degradation, latency or other negative effects to the end user’s experience. From Nasdaq to the Bolsa de Santiago, clients also appreciate its ease of use, according to Hanni Chehak, director of marketing. “What resonates with most of our customers...is the fact that our library is 100% customizable,” she explained.
Replacing Hardware on Trading Desks
Voice trading communication platform Cloud9 is gaining momentum in the trading communication space, with rapid growth in the number of active users and a $30 million round of investment from J.P Morgan, ICAP and Barclays, which are also customers. Cloud9 offers a cheaper, more flexible, and more secure alternative to the traditional telephone turrets used on trading desk, according to Laura Sankowich, head of marketing for the New York City startup. All-in, costs for the digital system are about half of a physical turret. Just as importantly, calls can be made through a variety of different channels, including tablets, and the communications are stored and encrypted in an Amazon Web Services cloud. Over 2700 users in 29 countries now use the service, and the volume of Cloud9-routed calls has risen to 500,000 per week.
Low Latency Market Data through the Cloud
Markets keep getting faster and more complex all the time, and only a handful of major institutions can afford the technology needed to take full advantage of the many opportunities created by the digital trading world. MayStreet hopes to change all that with its capital markets intelligent cloud, a cloud-based service that provides ultra low-latency solutions for market data, order entry, and market microstructure analysis. Patrick Flannery, a software engineer, started the company four years ago after gaining experience in building systems for proprietary trading firms. Looking forward, he sees additional opportunities in helping firms meet new audit trail requirements by providing them with the tools they need to collect and organize vast amounts of trading data.
Trader Workstations at a Fraction of the Cost
Four decades ago, Michael Bloomberg spotted an opportunity to give the financial markets a better way to access information than they had ever had before. Several years back, one of his employees, Morgan Downey, saw another: the need for a more intuitive, more secure financial information portal that costs a lot less than a Bloomberg terminal or the equivalent service from Thomson Reuters. Money.net’s cloud-based system offers market data, news, chat and analytical functions designed for traders as well as a modern interface built on new code. Downey estimates that the two information giants now control 80% of the financial information market, but he believes they are much more vulnerable than they appear. “They’re like TWA and Pan Am in the 1980s,” he said.
Algo Design for Everyone
Since 2013, when an engineer frustrated by the lack of open source algorithmic financial code founded QuantConnect, 21,000 quants have joined his online community. Founder Jared Broad’s colleagues include programmers at banks, hedge fund quants, individual engineers, and traders. Members enjoy free access to all kinds of code useful for building trading algorithms and a vast library of historical financial data suitable for back-testing their ideas. according to Broad. "We democratize algorithmic trading by making difficult and expensive technology available for free through a web browser," Broad said. "We drive an open source project sharing cutting edge investment technology which we believe will be the foundation of hedge-funds and investment groups in the future."
Big Data Analytics for Options Traders
When he was still an options trader, Leav Graves had a problem: market data volumes were increasing so rapidly that it was difficult to keep up. Realizing that other traders might be having the same problem, he helped found SamurAI in 2016. The company, which is less than a year old, is building an analytics engine that can sort through reams of market data and analyze patterns and anomalies in real time. Graves says the AI in SamurAI doesn't stand for artificial intelligence but rather "augmented "intelligence," as in having a virtual assistant to make suggestions, find connections, and assess risks. For example, the company can help asset managers find the best hedges for their clients' portfolios, help market makers learn when best to hedge their risk, and help traders find the optimal trading strategy. “We’re democratizing the process of doing options,” he said. But quants have no need to worry, according to Graves. “We’re not going into the algo realm, we’re not trying to replace the person. We’re trying to augment."
Finding the Next Generation of Traders
As the trading floors at the Chicago futures exchanges began to give way to technology, Michael Patak, a veteran futures trader at the Chicago Board of Trade, began to think about the next generation of traders. Previously traders had served a kind of apprenticeship, starting as runners and gradually working their way up. Where would they come from now? His answer is Top- StepTrader, a Chicago-based virtual platform designed to develop trading talent. The pitch: test your skills on a simulated account, and if that goes well, Topstep will back you with funding. Open since 2012, the company currently funds over 400 traders from 149 countries, according to Conor Meegan, vice president of business development. Traders range from students to retirees, all of whom Topstep funds with $30,000, $50,000, $100,000 or even $150,000 accounts. “We don’t care about your education l
evel, your background, your experience, your location, your race, or your religion,” said Meegan. The company charges a small monthly fee for simulated trading and market data. Once funded, a trader keeps 80% of his or her profit.
Sophisticated Options Analytics
Understanding how to price options and adjust that pricing in real-time as market conditions change has become a high-risk, deep-pocket sport. It requires not only a low-latency infrastructure, but also deep knowledge of the market’s micro-structure, the exchange landscape, and risk management techniques, combined with extremely fast algorithms to calculate volatility, risk, and more. Leading firms have the resources to build this infrastructure in-house, but for everyone else, one solution is Volar Technologies. The New York-based startup offers the tools to build a competitive pricing, curve-fitting and risk infrastructure, including the proper handling of cash dividends, implied borrow costs, and implied volatility surface fitting. The founders have more than 50 years of experience in this domain, and their goal is to make it available to market participants at a fraction of the cost it would take to develop in-house. “We are, so far as we know, the first firm that offers this kind of infrastructure,” said CEO Timothy Klassen, whose experience includes building the options analytics infrastructure and quant team at Getco and designing the "new" VIX volatility index that the Chicago Board Options Exchange began disseminating in 2003.
Pre-Trade Risk Controls on a Chip
In today's high-speed electronic markets, brokers must have the ability to screen the orders passing through their systems and filter out the mistakes--before they reach the market. Hyannis Port Research solves that problem by putting pre-trade risk controls on an FPGA chip. HPR's patent-pending solution can detect and stop erroneous and potentially disruptive trades in a microscopically small amount of time, a key advantage for clients that do not want delays as their order messages travel to the market. HPR began by focusing on the U.S. equity market, and after only four years in business, 7.6% of US equity trades pass through its systems, according to Tony Amicangioli, the company's president, CEO, and founder. The company is now turning to other markets, including futures, where there is an urgent need for pre-trade risk controls. “Every connection between a trader and a market worldwide – I don’t care what asset class it is, I don’t care what geography it is, the entire global market needs to be upgraded,” said Amicangioli.
Capital Efficiency through Swap Compression
As capital requirements for derivatives holdings have risen, counterparty risk compression has become an increasingly important strategy for coping with the new business. Now a New York startup has developed a new way for the sell side, buy side, clearinghouses and end users to optimize their counterparty exposures through multilateral compressions. Led by CEO Lucio Biase, a successful fintech entrepreneur whose background includes stints at Lehman Brothers and Credit Suisse, LMRKTS has developed algorithms that can winnow down offsetting counterparty exposures, either by adding new positions or terminating some existing exposures. The company has support from UBS, Tradition and several other major financial institutions, and this fall it announced that former U.S. Treasury Secretary Lawrence Summers had agreed to join its advisory board. In October, LMRKTS mdemonstrated its abilities by conducted a compression run for six banks that eliminated $430 billion of overlapping foreign exchange trades across five currencies. That type of reduction in outstanding positions leads to big reductions in regulatory capital requirements and big improvements in operational efficiencies.
Next Generation Compliance
Formed in January 2016, Panalytics offers a unified surveillance system that uses machine learning and natural language processing to search multiple communication streams and a variety of data points for worrisome anomalies. In addition to looking across the company’s internal communication streams, Panalytics correlates external tick data and news sources to uncover potential problems such as insider trading, market manipulation and improper sales tactics. The goal, said Christopher Ricciuti, co-founder and CEO, is to identify potential problems that could trigger an investigation. There are already a number of advanced surveillance solutions in the market, but Panalytics says its solution goes one step further because it integrates with existing compliance review workflows. The company also is working with several broker-dealers to test its system and improve its algorithms.
Intelligent Data Extraction
Only 20% of the data generated and received by businesses every day is accessible in a structured format, according to Semantic Evolution executives. Within that mass of data, there might be interesting arbitrage opportunities or potentially serious risks, but to access that data you need an analyst who can read at the speed of light and extract that information without errors. The London startup’s high-speed parsing engine is designed to do just that, extracting information from all kinds of sources, from instant messages to invoices, financial statements, regulatory filings, trade confirmations and annual reports, in a way that makes the information usable and actionable. “There are vast opportunities for Semantic to extract and normalize data,” said Edouard Chalopin, a former Markit executive who founded the company in 2011.
Distributed Ledgers in the Cloud
A huge amount of money is pouring into companies that are using blockchain technology for financial transactions. The idea is that the distributed ledger concept originally put to use for trading bitcoin can instead be used to transform clearing, settlement and other functions in the financial markets. Ubixi, a San Francisco-based start-up, is entering the fray with a different approach. Instead of developing an entirely new payment system based on blockchain technology and digital currencies, Ubixi is building a system that will allow institutions to share transaction and payment information through a common gateway on the Ubixi cloud. In effect, the company is building a shared ledger that does not need a native crypto-currency and does not convert assets into digital tokens. Although the company is less than a year old, it is working with futures brokers and exchanges on a beta version of its technology and is planning to file for patents on its invention.
Trading Platform for Crypto-Currencies
Until now, the crypto-currency market has been virtual Wild West, a promising frontier plagued by outlaws. But here comes the cavalry: three cyber-security experts have launched Bittrex, a platform for trading Bitcoin, Ethereum and more than 100 other digital currencies. The platform has been built from the ground up with security in mind, with the goal of fending off the types of cyber-attacks that are rampant in this sector. Unlike traditional asset transactions, digital currency trades are settled instantaneously and irreversibly, creating a need for much greater security, said Bill Shihara, CEO and co-founder, whose other experience includes managing security response and engineering for Blackberry. Bittrex also opted to differentiate itself from other platforms by incorporating in the U.S. and seeking regulatory recognition, including applying for the new "bit license" issuedby New York State. To expand its appeal to professional traders, Bittrex is working with companies such as ChartIQ to provide the kinds of tools that traders need. Trading on the exchange currently averages between $1 million and $2 million per day, and once the exchange finishes the licensing process, Shihara expects to begin supporting trades between cryptocurrencies and "fiat" money such as U.S. dollar.
Trading Platform for Physical Commodities
Futures exchanges serve as a source of price discovery and risk management for commodity markets, but they are not well suited for the buying and selling of actual cargoes of the underlying commodity. That's where PanXchange and its founder, former Cargill sugar trader Julie Lerner, see an opportunity. The Denver-based software platform allows buyers and sellers to negotiate online over the specific details of a trade, including the location and timing of delivery and the exact quantity and quality of the commodity. The company has been live in East Africa for more than a year and a half, offering the negotiation and trade of more than 20 different agricultural commodities in Kenya, Uganda and Tanzania. In the fall of 2016, PanXchange went live in U.S. feed grains with more than 50 traders and has already doubled the member base. Moreover, Lerner explains the value of the data generated on the system, "we are gathering unprecedented, objective price discovery in real time."
A New Type of Single-Day Options
After watching the runaway growth of volatility options and weekly options over the past decade, Robert Krause decided there might also be demand for daily options to get a more precise exposure to volatility. Others have thought of it, he said, but were daunted by the challenge of building and paying for the massive new infrastructure that standard daily options would require. Enter Krause’s delayed strike daily option, now pending approval at the Securities and Exchange Commission. Rather than listing a separate contract for each strike price, which would entail a huge increase in the number of contracts, his contract is designed to be forward starting. “We only need one call and one put each day,” noted Krause, a former senior executive at Zurich Capital and the founder of the Volatility Exchange.
Settlement Via the Blockchain
Amid the crowd of companies that are aiming to leverage distributed ledger technology, t0 stands out for its ambition to disrupt clearing and settlement. The company, which was founded by Patrick Byrne, the chief executive officer of the e-commerce company Overstock.com, aims to reduce settlement times for equity trades from the current two to three days to zero through the use of a distributed ledger system. “This is technology that has the capacity to disrupt both exchanges and centralized clearing houses,” said Judd Bagley, chief evangelist for t0 and chief communications officer of Overstock.com. The company is doing more than just talk about it, however. T0 is poised to support the actual issuance of stock in Overstock.com via its blockchain technology, and has lined up a registered broker-dealer to manage the offering, which is scheduled to take place before year-end.
Turning Cloud Computing into a Tradable Commodity
Cloud computing is rapidly becoming an essential element in the modern Internet economy, but until now companies haven’t had a good way to hedge its costs. The UCX (Universal Compute Exchange) is designed to change that. Jack Bouroudjian, director of financial products and co-founder of UCX, described the 10-employee Chicago-based company as a “global on-demand spot exchange that brings cloud service providers, brokers, and demand enterprises together for central price discovery, trade execution, and the physical delivery of cloud infrastructure contracts.” Launched in September 2015, the UCX system runs on a matching engine licensed from the CME Group. CME is taking a keen interest in the startup, and holds a 20-year license to launch futures and options on futures on the cash contracts created by UCX.