Futures Consolidation Drives Tech Change

Terry Flanagan

Consolidation in the futures industry is having an impact on technology use by futures commission merchants, according to Carl Gilmore, co-head of Wedbush Futures.

“Over the last several years, what we have had to do is re-engineer all of our business processes,” Gilmore told Markets Media. “The primary business model for an FCM has been heavily dependent on interest income, and interest rates have been at zero virtually for the past eight years. There really is no income, so to survive we’ve had to reorganize the way we do things from front to back. Technology has been a big part of how we have reorganized those businesses, and how we operate them today.”

Consolidation is affecting several segments of the industry, including FCMs as well as proprietary and high-frequency trading firms. As Gilmore explained, this consolidation is driving the conversation around impact on technology, pertaining to  “how our needs have changed, what each of the companies is doing with their technology, how they’re using it, are they using it differently, etc.”

Carl Gilmore, Wedbush Futures

Carl Gilmore, Wedbush Futures

The Chicago-based Gilmore had been head of futures at KCG Futures, which was bought by Wedbush in December 2014. Previously, he was global enterprise risk manager at Penson Worldwide.

The traditional FCM business model has been under tremendous pressure to reinvent itself since the global financial crisis of 2008-2009, according to Tabb Group’s Matt Simon. “These pressures have forced many once-leading firms out of the business,” he said in a report. “The industry survivors are left to adapt to a new set of market conditions with different opportunities and services to offer.”

The business model of an FCM is heavily technology-dependent, spanning execution, clearing and risk management. Wedbush Futures maintains memberships at the major U.S. and international futures markets including CME Group, ICE U.S. & Europe, Eurex, and NYSE Euronext Liffe. It offers KFIX API, an advanced electronic trading capability based on the securities industry FIX standard protocol.

“We strive to automate as much as we can through the entire life of the trade cycle, from trade to execution to clearing to custody,” said Gilmore. “What we have had to do is lean more heavily on technology, and it has to be in an integrated way. The days are over when a bunch of different kinds of technology from the front office didn’t talk to the middle office, didn’t talk to the back office, didn’t talk to compliance, didn’t talk to risk management. All those sorts of disparate systems are too expensive.”

Wedbush Futures has taken a “manufacturing” approach to its business operations, whereby “to the extent that we can build a machine that helps us solve our clients’ business needs efficiently, that’s what we’ve done.”

The approach embraces a variety of technology platforms from front-ends trading systems to middle office, and client account servicing. “We use as many off the shelf items as we can, with some in house proprietary technology,” said Gilmore. “It’s not about using ‘new’ technology, but about using it in ways that we never did before to achieve our business goals.”

Gilmore likens the approach to that of solving a puzzle. “What we’re doing is using the existing tools that are all out there, and assembling them in a way that’s more efficient and that helps us do what we need to do at lower cost.”

For FCMs, predictions about their imminent demise are greatly exaggerated. “People are saying that the FCM model is broken, but I don’t believe that,” Gilmore said. “While it’s been no cakewalk over the last 8 years, the resulting businesses that had survived are better organized and more efficient, with more capacity and better customer protections than they had before. The marketplace has forced us to adapt or die. The ones that couldn’t do it are gone, and the ones that have been able to do it are here, and we continue to be in business.”

Featured image via bluebay2014/Dollar Photo Club

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