DRW Trading eyes increased role amid bank withdrawals

The prop trading firm has increased its position in the derivatives market following increased retrenchment from banks.

DRW Trading Group, one of the world’s largest proprietary trading firms, is targeting an increased role in derivatives markets as banks continue to retreat. 

Don Wilson, founder and CEO of the Chicago-based firm, said on Wednesday at FIA Expo 2016, that it is stepping up its role in derivatives, with many banks reducing their amount of risk in the face of heightened capital requirements. 

“The amount of risk banks are able to take in the markets has diminished, and that was on purpose. The cost of that is because of a reduction in risk capital there will be gaps [to fill],” said Wilson.

“We have increased our risk in the market, and actually have hired a lot of experienced risk takers coming out [of the banks], and we have a platform to support that activity. Firms like DRW are stepping to add that risk capital into the market.” 

DRW’s core business focuses on trading on cleared listed derivatives exchanges, while also acting as liquidity providers. It also one of five proprietary traders to back US swaps futures exchange Eris Exchange. 

Wilson explained there is now widespread acceptance of new products from the over-the-counter market to the listed markets, however there is still some convincing needed for traders to adopt them. 

“One of my pet peeves when people talk about liquidity in the futures market is that people say ‘the open interest is this product is only 100,000, if we started trading it we would be too big of a percentage of the open interest so we need to wait for it to get bigger’. However when someone trades a cleared swap there is often zero open interest, and yet this discussion doesn’t come up,” he added. 

JP Morgan’s global head of clearing, Nick Rustad, highlighted that wider adoption of cleared products will be dependent on inter dealer brokers and the influence the non-cleared margin rules will have.

“It is still highly dependent on the interdealer community, particularly in the OTC space. As you get the interdealer community clearing the product, then you get the next level where clients and FCMs request it because they want to trade the same product,” said Rustad. 

“The process of non-cleared margin rules making inflations swaps and NDFs clearable, you will see a continuation from bilateral into the cleared world.”