Tastytrade, Peak6 invest $10 million in new exchange A trio of Chicago trading industry entrepreneurs are betting on a new futures exchange upstart aimed at retail traders. LYNNE MAREK PRINT From left, Matt Hulsizer, Jenny Just and Tom Sosnoff Tastytrade and Peak6 are investing $10 million in a new Chicago enterprise called the Small Exchange, which aspires to be a futures and foreign exchange trading platform for retail traders. Tastytrade co-founder Tom Sosnoff, a trader turned entrepreneur, is teaming with Peak6 co-founders Matt Hulsizer and Jenny Just to launch the Small Exchange, placing Donnie Roberts in its top post as president and CEO. In a Tastytrade video posting, Sosnoff called the venture a “new futures exchange” with standardized contracts and central clearing that he expects to launch in the fourth quarter, if it wins regulatory approvals. He didn't specify what types of contracts would be traded. He has been working on the Small Exchange for a couple of years. It will sell subscriptions for $100, which will turn into "seats" on the exchange if it receives regulatory approvals, he said. It will be separate from Tastytrade. “You don’t buy this as an investment, you buy it as something you can use,” Sosnoff said in the video. “We expect this for people that are traders.” Still, he said, there will be a limited number of subscriptions in this round, and he expects they’ll increase in value later. The platform will start with futures and add options later, said Sosnoff, a former trader who made his fortune in the options industry. He is a co-CEO of Tastytrade with Kristi Ross, and he is its largest shareholder. Sosnoff reaped big gains after he founded Chicago online options company Thinkorswim Group and sold it in 2009 to Omaha-based TD Ameritrade for $606 million. His follow-up Chicago firm, Tastytrade, launched in 2011 as an online media company targeting its trading talk show at everyday investors, and added its Tastyworks brokerage arm last year after breaking away from early investor and partner TD Ameritrade. The media and brokerage business last year landed a $20 million investment from Menlo Park, Calif.-based TCV, which previously invested $25 million. The largest investor behind Small Exchange's $10 million funding is Tastytrade, said Roberts, who was an early employee of Thinkorswim and went on to become president and chief operating officer of TD Ameritrade Futures and Forex. Currently, the Chicago startup has five employees, he said. He is not an investor but expects to be in the next round of funding, he said. Roberts said he's in talks with TD Ameritrade, R.J. O'Brien & Associates, Charles Schwab and other brokers about connecting their retail customers to the exchange once it has received approvals for operation. In 2017, Sosnoff also invested in the futures business by making an investment in Seed Futures. Similarly, Hulsizer and Just, who are veterans of the Chicago trading industry, have been making investments in startups for years, some related to the trading industry and others outside it.
I have consistently spoken out against fractured markets. The only advantage to many markets is if they compete based on cost and/or technology. I prefer to have one market for price discovery, pay one market data fee and have one counter party that is well funded. I see no advantage to another exchange, even if their fees are lower. What come with that is wider markets and less liquidity.
It's a fool's errand. Even when I see an established futures exchange duplicate another exchange's product it inevitably fails. Even if they subsidized market makers, the bid-ask will be wider than the existing exchange product bid-ask spreads. In essence, the proposition to the retail trader will be: 'save $2 in round turn commissions but lose $62.50 in execution slippage'. And existing trading exchange micro tic products withered on the vine and died as well. I understand the appeal of a person being able to trade micro futures with a $5K or $10K account. But even with the micro tic feature, the trader's nominal equity balance is going to get eaten down quickly by the exchange fees and the brokerage fees. Nowhere in this press release did the Small Exchange commit to an exchange fee and retail brokerage fee structure that emulates in a directly proportional scale the reduced tic and notional values of their micro product suite. Fail.
I don’t see the market for it. If my account/risk tolerance could handle swing trading futures I’d be super thrilled. I’d be ecstatic if stocks went to a central exchange. Not ever trading futures, the commissions/fees I’ve seen advertised seem very reasonable. I can’t see any new exchange for retail which I guess means smaller contracts? Be any more competitive then the CFD market.
I think idea for new exchange is to make money by selling retail order flow. I ran into this interesting Chat with Traders interview with stock trader Dennis Dick on how to trade in a world of sold early access retail broker order flow.
Well, according to the press release above, Small Exchange "aspires to be a futures and foreign exchange trading platform for retail traders". And I cannot see how the CFTC or the NFA would be accommodating to selling retail futures order flow. Note that CME has not in the past and does not currently sell order flow for ES or NQ - and that Eurexchange has not in the past and does not currently sell order flow for either European equity index futures or on futures contracts on equity names. There's a reason for that. The NMS is only set up for equity listings and not futures contracts. I'm not a securities attorney but my guess is that it's not legal to sell futures or forex order flow in the United States.
I suspect it's not illegal to pay for futures flow with the right legal work and filings. Right now they are all monopoly exchanges with monopoly clearing. They do incentivize members to trade new products both here and in Europe. So payment to members has been going on for a while in the futures space. The Small Exchange will have to go into a new space because they will never get licensing for branded products and he talks about new products in the video, but he won't get into CME Clearing - so CME products are probably off the table. ICE will also be impossible. The other clearing organizations will probably allow him access, but I suspect he may create his own clearing. OCC will let him in for "securities" based products. I suspect it will more be an attempt to internalize some funky products including structuring some CFD like products that could conform to CFTC/NFA rules. I also suspect he will most likely structure some volatility based products. I'd bet Peak6 has some products on the shelf that they would like to see listed, especially in the volatility space. It's also a cheap bet to garner some customers as guinea pigs, especially if they come on as members. What will be interesting to see is if other brokerage firms(other than all the variants of TD) embrace the concept.
i used to respect Sosnoff as a trader but his handling of tastytrade brokerage and this news makes me wonder: how badly is he doing as a trader such that he's constantly making crappy business decisions that actually hurt the retail trader? it completely goes against his whole facade of standing up for the average joe retail trader.
As I understand it, (again, I am no securities lawyer) - the SEC's Regulation NMS (promulgated in 2005) and the SIPs processing is only for the equity security markets. NBBO designations are not allocated to regulated futures contracts. In other words, it would take a change in federal statute and not just a routine legal filing through existing SEC channels to be able to pay for order flow on a regulated futures exchange. If anything, there is a growing momentum among the corporate law scholars and the trading community to repeal the NMS Regulation as it's effect has been seen as having negative consequences on the markets. * * "Recovering the Promise of the Orderly and Fair Stock Exchange", Yale Law 2017