DRW founder braced for return to volatility
Prop-trading specialist says investors look too assured about higher European rates
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.
Don Wilson cites uncertainty over elections in Europe and the size of deposits flowing into Switzerland as having implications for interest rates