Martin J. Leamy is president of Orc Software Americas, the U.S.-based subsidiary of Orc Software. He is responsible for sales and marketing initiatives as well as support and engineering. He joined Orc in 2009 and has been in the software and technology industry for more than 20 years. He spoke with Sarah Rudolph, the editor of JLN Options Newsletter, about regulatory uncertainty, high frequency trading, and Orc’s recent move to offer access to the Brazilian markets through the broker Alpes Corretora de Cambio.
Q: Would you give me a little bit of background on Orc’s growth as a company?
A: We have been in business for more than 20 years. We are headquartered in Stockholm; we began as a market maker in Stockholm in the late 1990s and thought we had a better business opportunity selling the software side of the business. We came to the U.S. in 2001 and went public. We are a small public company – we have about 400 people in all.
Our very strong client base is made up of banks and proprietary trading firms in twelve countries. We offer 100 high-speed connections to exchanges and brokerages. Among our products (which we offer across asset classes) are: Orc Trader, a click-trading product, and for sophisticated investors we have Orc Liquidator, a grey-box liquidation engine to develop customized trading strategies for us in high speed, low-latency strategies. Business has been good despite this challenging time in the industry. Most recently we are making the move into trading in Brazil.
Q: Tell me about that push into Brazil, which you began November 1st.
A: Well, we are a global company, so we have offices throughout Europe and in New York, Chicago, and Toronto, as well as throughout Asia, where we have a headquarters in Hong Kong. There has been a lot of attention to new markets, Brazil in particular. We are looking to expand into that market.
A couple of key points about Brazil that are of interest to Orc are, one: There is a strong appetite for our Orc products in the local trading markets. Banks, prop firms, and hedge funds are looking at spread trading and volatility trading. Also the structure is being put in place to grow the high frequency market there. That fits well with the market we sell to. Some are looking for more sophisticated, out-of-the-box solutions, which we have.
Things are starting to come to fruition. The CME has invested in BMF Bovespa in Brazil, and early next year they’ll be putting their matching engine there.
The second interesting thing about Brazil is that our customers, particularly in the U.S. and Asia are very interested in trading the Brazilian markets. Clearly they feel there is an edge down there that they can take advantage of.
Q: How is the company, and the industry, being affected by the regulatory changes that are coming? A recent article in Traders Magazine suggested that software vendors like Orc are seeing a drop in their business because the Volcker rule, which affects proprietary traders, is still being shaped. The article said the uncertainty is making prop traders reluctant to invest in trading systems from software vendors.
A: There is a lot of uncertainty in the U.S., and I think that will continue into 2011. The Volcker rule would prohibit banks from having proprietary trading desks. From an Orc perspective that doesn’t worry me. I’m not taking a stance on whether that is right or wrong or whether those prop desks had anything to do with the financial crisis, but I think this industry is fairly incestuous. Guys who trade at one bank pop up at other firms, and if they know Orc they tend to call Orc. MF Global recently announced it is starting a prop desk, and it is attracting some top traders to that firm. From an Orc standpoint, it is still years before Volcker will be fully implemented, so we have a chance to ease into it. But banks will probably either spin out the prop desks and keep the funding separate, or traders will go to other firms.
Our business has been good. The fact that we are a global company means we can ride through various ups and downs. Our Asia market is growing great. And we have added staff in Chicago in particular in recent years; we have 41 people in Chicago alone. We’re doing well in a very tough time.
The biggest concern right now is uncertainty. Most businesses in general can handle change, whether it is good or bad, if they know what is happening.
Q: What are your clients’ issues with uncertainty?
A: Their issues tend to be about, should they hire more people to grow the business? But prop shops don’t know what their tax situation is going to be Jan. 1st. The prop shops are in a very different situation from the banks. I think the uncertainty makes people hold off taking any particular action, whether it is hiring people or investing in new technologies.
Q: You mentioned you cater to high frequency traders. Do you foresee regulators cracking down on high speed trading in the near future?
A: I think there’s a lot of speculation on that, but I haven’t seen specifics on where they’re planning to put restrictions. The question a lot of people are asking is, “Are high frequency traders market makers? Should they be held to the same rules as market makers?”
As far as our move into Brazil, I’m not worried about regulations there. They really just introduced their market maker capability this year. So it’s in its early stage and will continue to grow.
I think we’re in the middle of a shift in this industry. I’m not sure where it will land. So many of these rules are being written right now. But we will come out on the other side, and it may seem very different in a few years.
Q: What other trends are you watching in the options industry? Any thoughts on the variety of market models, the move towards – or in some cases away from – the maker-taker model?
A: I’m not sure how the maker-taker model is going to fall out. Market makers are under a lot of pressure now, as the question is being asked about whether high frequency traders should play by the same rules as market makers. I don’t know how big a trend that is.
Q: Could a move to make high frequency traders conform to market maker rules hurt high frequency trading?
A: There is certainly a bar you have to be at to play successfully in the HFT space. It’s hard to know how people might change their business strategies to adapt. HFT guys may just adapt their strategies. We have software that enables you to do that. But if the rules change, they will have to play along. But I don’t think the HFT guys are going to be forced to play by market maker rules. First you have to define what is a high frequency trader. And people have different ideas about that.
There is so much fragmentation in the options industry right now, and I don’t see that changing in 2011. But everyone has a different business model in these [U.S. options] exchanges. I recently heard the CFO of BOX say that exchange has a 7 or 8 percent market share. They are profitable. They have a model that works.