DRW founder braced for re­turn to volatil­ity

Prop-trad­ing spe­cial­ist says in­vestors look too as­sured about higher Euro­pean rates

Financial Times Middle East - - Markets & Investing - GRE­GORY MEYER AND PHILIP STAFFORD BOCA RA­TON

Don Wil­son says his com­pany is “in the busi­ness of tak­ing risk .”

DRW, named from his ini­tials, is one of the largest pro­pri­etary trad­ing firms. From a base in Chicago, it bets its own cap­i­tal via fu­tures con­tracts listed on 40 ex­changes. As Wall Street banks take fewer risks, com­pa­nies such as the one he founded have filled the vac­uum.

There is plenty of risk in the mar­kets DRW plies. Don­ald Trump has promised to roll back re­forms passed af­ter the fi­nan­cial cri­sis. Europe has sched­uled a se­ries of piv­otal elec­tions. While pop­ulists fiz­zled at last week’s Dutch polls, a more im­por­tant French elec­tion is fray­ing in­vestor nerves.

But mea­sures of im­plied volatil­ity for equities, bonds and cur­ren­cies have eased af­ter peak­ing in the wake of Novem­ber’ s US elec­tion.

Mr Wil­son, DRW chief ex­ec­u­tive, says he has been sur­prised by the lack of volatil­ity since Mr Trump’ s elec­tion.

“There are many things that could hap­pen that could cause volatil­ity to in­crease,” he said at a fu­tures in­dus­try con­fer­ence in Boca Ra­ton, Florida, last week.

“In this en­vi­ron­ment, be­ing long some wings is prob­a­bly a good idea,” he added, re­fer­ring to op­tions that pay out if mar­kets be­come highly stressed.

In Europe, he be­lieves mar­kets may be too con­fi­dent of higher in­ter­est rates. He points to un­cer­tainty over the elec­tions and the size of for­eign de­posits flow­ing into Switzer­land, where rates are neg­a­tive.

“There’ salo to frisk of some­thing mis­fir­ing and people be­com­ing more con­cerned. Yet the mar­kets aren’t re­ally say­ing that.”

DRW faces tur­bu­lence of its own. Mr Wil­son is await­ing a judge’s rul­ing af­ter the US Com­mod­ity Fu­tures Trad­ing Com­mis­sion ac­cused him and his com­pany of “brazen and re­peated acts to ma­nip­u­late” an in­ter­est-rate fu­tures mar­ket six years ago. Rather than set­tle with the reg­u­la­tor, Mr Wil­son chose to fight the civil charges at trial.

The trad­ing in­dus­try is ner­vously fol­low­ing the case, both for its im­por­tance in defin­ing what con­sti­tutes ma­nip­u­la­tion and its po­ten­tial to hob­ble DRW. The CFTC seeks a per­ma­nent trad­ing ban for Mr Wil­son and DRW if they are found li­able.

Few trad­ing firms are as in­flu­en­tial as DRW, es­tab­lished in 1992 by Mr Wil­son, then an op­tions trade ron the floor of the Chicago Mer­can­tile Ex­change. The group has 750 em­ploy­ees, two-thirds more than five years ago. By con­trast, Virtu Fi­nan­cial, a New York peer, has fewer than 150, ac­cord­ing to anan­nual re­port.

Mr Wil­son, 49, “is ab­so­lutely viewed as a leader in the in­dus­try”, said Matt Har abu rd a, pres­i­dent of XR Trad­ing.

DRW is known for high-fre­quency trad­ing in frac­tions of a sec­ond. A sub­sidiary sub­mit­ted plans to build a ra­dio tower on the English Chan­nel to beam data be­tween Lon­don and Frank­furt. But a UK coun­cil re­jected the pro­posal fora struc­ture the height of the S hard.

As traders in­vest to shrink data de­lays from mil­lisec­onds to mi­crosec­onds, “the in­cre­men­tal im­prove­ments are con­stantly smaller ”, Mr Wil­son said.

Some com­pa­nies have quit, leav­ing big­ger ones such as DRW, Jump Trad­ing and Virtu.

“To be the fastest in a pure speed game does re­quire greater re­sources,” he said.

DRW says only a quar­ter of its busi­ness de­rives from speed trad­ing. It holds some po­si­tions open for months, as ev­i­denced by those at is­sue in the CFTC lit­i­ga­tion. Or years: Con­vex­ity Prop­er­ties, a DR W divi­sion, de­vel­ops real es­tate.

Mr Wil­son sup­ports push­ing pri­vately ne­go­ti­ated trades, such as in­ter­est-rate swaps, on to fu­tures mar­kets where costs are gen­er­ally lower. Un­like a typ­i­cal pro­pri­etary trader, he is also an in­ven­tor: DRW has li­censed its pa­tent on vari­ance swap fu­tures, which track volatil­ity, to Ger­many’s Eurex ex­change, and has cre­ated an in­ter­est rate con­tract to be listed by US-based In­ter­con­ti­nen­tal Ex­change.

The rise of elec­tronic trad­ing firms has ac­cel­er­ated ex­change vol­umes and of­fered a sense that mar­kets are liq­uid, or easy to en­ter and exit. But in­creas­ingly fre­quent flash crashes sug­gest

‘There’s a lot of risk of some­thing mis­fir­ing and people be­com­ing more con­cerned’

that those traders flee when they are needed most.

Mr Wil­son blames shaky liq­uid­ity in fixed in­come mar­kets on the re­treat of banks, which once held more bonds in in­ven­tory. “If you push risk cap­i­tal out of the mar­ket, you have to ex­pect greater risk of flash crashes.”

He de­clined to elab­o­rate on the CFTC case, but on a panel in Florida he be­moaned what he called “gotcha reg­u­la­tion” and said govern­ment lawyers were “more interested in col­lect­ing fines and gen­er­at­ing head­lines than in mak­ing mar­kets bet­ter”.

A loss for the CFTC could shat­ter its the­ory of mar­ket ma­nip­u­la­tion, while de­feat for Mr Wil­son could im­peril his com­pany. For both sides, it is risky busi­ness.

FT Mon­tage/ Christopher Dilts/Bloomberg

Don Wil­son cites un­cer­tainty over elec­tions in Europe and the size of de­posits flow­ing into Switzer­land as hav­ing im­pli­ca­tions for in­ter­est rates

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