Here are some key quotes from my latest podcast with Tim O’Shea, President and COO of Thales Trading Solutions, talking about listed derivatives and the futures market:

“I think derivatives in general can represent OTC products, products traded off an exchange. And I think the definition of a listed derivative is one that is actually listed on exchange and traded through a more organized fashion. Furthermore, if you take listed derivatives, in my view, they can represent security products as well as futures products.”

“So a firm that focuses on futures is normally called an FCM, which stands for futures commission merchant. And it’s a registration that the NFA and CFTC recognize and the exchanges recognize that you are required to be an FCM to hold customer funds and provide clients access to the markets.”

“When you trade a futures contract, there’s a single point of execution, and in the old days that was in a trading pit. You had to call the floor and place an order with a firm. And that firm would then run the ticket into the exchange pit, and some independent broker in that pit would execute your order for you. Today, with the advent of electronic trading more and more – certainly, I would say almost the majority of futures contracts – are executed electronically.”

“I saw the opportunity to look at the trading side being a broker, staying on the floor, versus going upstairs to becoming an operational person. And I felt that my mind and my skills were better fit in the operational area.”

“I would say from a technology perspective, the biggest issues we have are around margin calculation, transparency into margin calculations, obviously risk, looking at value at risk and stress tests.”

“What Thales invested our technology dollars in was to aggregate all these different portals into a single portal so that clients, regardless of who they use to clear and/or execute, we have a single platform that takes data from all 18 different FCMs and brings it into a single platform so clients can have a single report, a single data set, a single reconciliation tool, or tool to do allocations or run risk.”

“We’re seeing from a technology perspective and an execution perspective, we’re seeing more and more algorithms being applied to the execution of orders through the various third party technology vendors who compete directly with the bank FCMs or many of the FCMs who have their own proprietary algos.”

“The regulatory environment, cost of capital, and the amount of capital that the FCM is required to carry for customers is becoming more and more of a burden. And I think we’ve seen some FCM have scaled back to their operations because of these costs.”