Proprietary trading shops are mushrooming in Chicago.
More and more firms specializing in options and foreign exchange trading are setting up shop in the Windy City, according to a vendor who services them. Many are refugees from the big investment banks.
“It’s a burgeoning market for us,” Fintan Quill, a senior engineer at KX Systems, said. “And Chicago is an especially big focus.”
Quill explained that while a handful of firms have the money and wherewithal to compete on speed, many more don’t. This second tier is taking advantage of the move to electronic trading in options and foreign exchange by developing innovative trading strategies.
“At the top level, you have maybe four or five shops that are literally just pinging,” he said. “It’s purely about speed or laying down fiber. But at the level below that, you have all these quants coming in and applying mathematical techniques. They’re doing correlation across different asset classes or within the same asset class.”
In options, strategies might include arbitrage across the growing number of exchanges. In Fx, the move from manual trading to electronic is drawing players in.
While the phenomenon is national, there is a preponderance of activity in Chicago, largely because the derivatives industry is already based there, Quill explained.
Most of the newcomers are non broker-dealers and their staffs are no bigger than 100 people. Many have migrated from large banks that are purging themselves of their proprietary trading desks as new rules—such as the Volcker Rule—come into effect.
Kx Systems, which sells technology used to process market data, has a large presence in the big banks, according to Quill. So when a team of traders decides to start their own shop they turn to Kx for their data needs.
Kx has also supplied Sun Trading—a hyper fast Chicago-based broker-dealer prop shop and market maker—with its technology since 2008.
