The Small Exchange: Building a new ecosystem for the little fish

Jim Kharouf

Jim Kharouf

Freelance Writer

It’s about time this industry got smaller.

It’s no secret futures markets have been built largely for the average multinational commercial operation, well capitalized market markers, hedge funds, CTAs and proprietary trading groups. Retail participants, despite the rise of “mini” contracts pioneered by the CME, are generally thought of as perch swimming with sharks, whales and barracudas – bait.

But The Small Exchange is aiming to change that by offering a slate of retail sized futures contracts to retail traders on equity indexes, bonds, FX, energies and metals. Contracts will be priced in dollars and cents and sized so that individual investors can trade them within their portfolios. Trading will be done on The Small Exchange’s self-developed trading and matching engine, designed specifically for this market. A clearinghouse has been identified but not announced yet. The exchange made a little more progress this past week at the FIA Boca conference with the announced connection to CQG and trade surveillance with Eventus Systems.

If all goes according to plan – and it’s currently working with the Commodity Futures Trading Commission – the exchange hopes to launch in Q3 this year.

Led by Donnie Roberts, president and CEO, and Pete Mulmat, executive vice president, business and product development, the organization aims to tap into the growing body of traders who have graduated from stocks into options and are now ready for futures. Just how big that pool of traders is, is debatable. But its biggest backers, Tasty Trade’s Tom Sosnoff and Peak6 co-founders Matt Hulsizer and Jenny Just, think there are enough traders out there that they put down $10 million to start The Small Exchange. It gauged initial interest with a $100 subscription drive, which grants early birds 50 percent off on fees and reduced market data fees. Mulmat said the subscription idea has attracted thousands of customers, and it is considering another round of subscriptions at a higher rate if this sells out. These are not, however, memberships in the exchange, like traditional markets.

For Roberts, a former TD Ameritrade executive, “this is about growing the pie.” And he should know a bit about that. The firm has more than 11 million trading accounts with more than $1 trillion invested. Roberts, along with JB MacKenzie, JJ Kinahan and Steve Quirk, helped grow the brokerage’s futures and options trading divisions into powerhouses at the firm. Of course, they are not alone. Fidelity, E*Trade and Schwab have also grown their options and futures businesses significantly as well through acquisition and via education. OptionsHouse, a Peak6 backed retail firm, was sold to E*Trade in 2016.

To bring this breed of trader into the markets, The Small Exchange created contracts its says are inherently easier to understand. All contracts are quoted in dollars and cents and cash settled on the third Thursday of the month. So bonds, for example, are quoted in dollars, not by yield. Mulmat said this approach makes trading simpler and cleaner for traders.

The Small Exchange has also built its own exchange infrastructure – everything from the matching engine to the risk management system. Mulmat and Roberts said an in-house technology platform allows it to change and add functionality as it sees fit, rather than going with an off-the-shelf platform. It is still working out details with a clearing house but should have that arrangement soon.

Getting brokers to connect to the market will be key to The Small Exchange’s success, as will dealing with much larger exchanges. (CME Group is pushing its Micro E-mini futures now.) Drawing enough retail participants to actually make viable markets is another challenge.

The smiles on Mulmat and Roberts’ faces tell a lot about how exciting this space is to them. Let’s see if they can create a new ecosystem where the perch can swim with other fish their size.

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