Citadel Securities and Jump Capital just backed an exchange looking to open the market up to Main Street
- Citadel Securities and Jump Capital, the venture investing arm of Jump Trading, each invested $5 million in the Small Exchange.
- The trading firms, which are two of the largest market-makers, plan to bring liquidity to the exchange, which is catering to Main Street investors with smaller, less-complex futures contracts.
- Exchanges have recently shown an interest in attracting individual investors to futures.
The Small Exchange just got a big boost.
Citadel Securities, the market-maker founded by Citadel CEO Ken Griffin, and Jump Capital, the venture investing arm of Chicago-based market-maker Jump Trading, have each made a $5 million investment in the trading venue aimed at making futures more accessible to Main Street.
The Small Exchange plans to offer small-sized futures contracts that are easier to trade for retail customers. Most futures contracts are too expensive for Main Street investors to trade them.
"We think that there is an untapped opportunity to make futures products more accessible to individual investors," Peter Johnson, a principal at Jump Capital, told Business Insider. "We think that the combination of the founding team in the Small Exchange ... with our capital markets experience sets them up really well to be successful in that venture."
Read more: A former TD Ameritrade exec wants to make futures trading more accessible to Main Street, and a dozen brokers have signed up
Arguably more important than the investment is both firm's involvement in the exchange as strategic partners. Jump Trading and Citadel Securities are two of the largest market-makers in the world.
Johnson said Jump plans to be a "foundational participant" for the exchange, serving as a market-maker there. In January, Small Exchange CEO Donnie Roberts told Business Insider 12 brokers had already given verbal commitments to the exchange.
"For any new exchange, liquidity is of utmost importance, and having one of the largest futures traders in the world helping to provide that should certainly be helpful in making the exchange attractive," Johnson said.
See also: CME's CEO explains how Main Street is taking more control over its portfolio from Wall Street and how the futures exchange is adapting
Jamil Nazarali, global head of business development at Citadel Securities, told Business Insider that as one of the largest market-makers for Main Street it only makes sense to get involved with an exchange looking to specifically cater to that segment of the market. Citadel Securities handles over 40% of US equities retail volume and is a top market-maker in options as well.
"As a new product class emerges, we want to be there for our customers' customers'," Nazarali said. "We trade across most electronically traded platforms and are a major liquidity provider across equities, options, futures and fixed income. We think this platform is going to grow very rapidly and we want to be there as a market maker."
Roberts, who's the former president and chief operating officer at TD Ameritrade's futures and forex division, told Business Insider in January that the Small Exchange would initially offer five cash-settled contracts based on proprietary indices.
The Small Exchange isn't alone in its push to open up the futures market.
The CME launched micro versions of its most popular futures to cater towards individual investors, with the new contracts going live May 6. In 2018, CME saw a 27% bump in retail customers' trading activity from the previous year.
Roberts told Business Insider that the Small Exchange is hoping to gain regulatory approval by mid summer, with a launch date by the end of the third quarter or beginning of the fourth quarter.
Johnson dismissed the idea that CME's new contract could eat into the market share the Small Exchange was going after.
"We see it as a rising tide," he said. "It's a recognition of this trend by another big player in the market. ... It brings visibility to these types of products, which is good."
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