New York gains on Chicago as trading firms consolidate – Finance News

on Oct3

2 October 2017 | 6:40 pm

Trading firm consolidation may ultimately favor New York businesses over Chicago’s pioneers, according to one longtime industry consultant.

In the latest possible merger, New York-based Hudson River Trading is reportedly bidding for Chicago’s Sun Trading. Both firms are private; neither returned calls seeking comment.

Firms in Chicago were some of the first to employ high-speed trading strategies to capitalize on pricing discrepancies in the markets. But with volatility in the markets drying up in recent years and spreads tightening, the local players may start to be at a disadvantage, according to Larry Tabb, founder of industry consultant Tabb Group. Future trading profits may favor those firms that are closer—both geographically and in their relationships—to the banks that place initial trades.

“The problem with Chicago is that while it was on the forefront of the proprietary trading groups, most of those guys, like many of the Chicago businesses, are trading out of their own capital,” said Tabb, who works in New York and Westborough, Mass. “It’s not client money. It’s their own money, and if they want to expand into the client business, the client business is New York-based, and that becomes harder to do in Chicago.”

‘PROP SHOPS’

Chicago firms are often referred to as proprietary trading firms or “prop shops” because they trade using only their own money, or with capital from private-equity firms that bought stakes in the firms, not on behalf of clients. Like other high-speed firms, they dart into and out of trades in stocks, derivatives and options through buy and sell orders all day.

Chicago traders emerged from the city’s options and futures trading pits in the 1990s to fund their own electronic trading firms. The biggest, including DRW Trading and Jump Trading, have grown to outfits with hundreds of employees, but there are also a slew of other midsize and smaller firms.

Now that the industry has been on the ropes in recent years, with market volatility disappearing just as technology and regulatory costs were rising, it’s been tougher for the smaller and midsize firms to keep up their businesses.

TRYING TO ADAPT

Many have tried to adapt by adding trading in more asset classes or by making acquisitions, but it’s been difficult, given competition from the biggest players.

Sun Trading tried to expand beyond its expertise in the trading of stocks to add trading in other financial markets. To that end, it made its own acquisitions, buying Toro Trading in 2013 and Endeavor Trading a year earlier, after trying to expand on its own into options trading and then pulling back.

It’s also tried working under a new management team in the past couple of years. Bernie Dan left as CEO in 2015, followed by some of his colleagues, such as Chief Financial Officer Chris Malo, and there have been more departures since then, including the exit of Sam Mehta as chief operating officer last year. Kevin Cuttica followed Dan as CEO of Sun Trading.

The industry has been scouring for profits as industry revenue dropped from $7.2 billion in 2009 to under $1 billion so far this year. As trades make their way through exchanges, dark pools and other hands, profits are extracted along the way, meaning market participants further down the chain collect less money.

Still, Chicago players can’t be counted out. They’ve been participating in earlier rounds of the consolidation, with DRW purchasing Austin, Texas-based RGM Advisors in August and Chicago-based Chopper Trading in 2015. Also, Chicago-based DV Trading picked up parts of Chicago-based Eldorado Trading earlier this year.

The successful bidder for a shrunken Sun Trading may point the way of future gains in the industry.

The Wall Street Journal reported Hudson’s interest in Sun Trading earlier.



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