Don Wilson founded DRW trading group 20 years ago as a sole proprietorship. Thanks in part to the emergence of electronic and then high-frequency trading, the firm has grown into a global force in the trading world, with more than 400 employees, and offices in Chicago, New York and London. But as high-frequency trading comes under increasing scrutiny, Wilson, who is also chairman of the Futures Industry Association’s Principal Traders Group, will be someone to watch. We sat down with him to discuss his company, his views on regulation, and how he sees the future of trading.
Tell us a little about how you started DRW.
I started trading in the Eurodollar options pit on the floor of the Chicago Mercantile Exchange in 1989. I actually started off trading during the day. Then I’d go home at night and write risk models and build volatility curves and that kind of stuff on my Macintosh computer. I’d go down the next day and do it again. Initially I was focused on making markets in the pit and combining that risk management skill with the skill sets of quantitative analysis and software development/IT. I formally founded DRW in 1992 with that focus.
Today we employ just over 400 people. We’re active in most exchange traded markets. But fixed income is still one of our core areas. We’re also very active in energy, grains, stock index futures and options, some equities. So it’s a pretty broad array.
Exchanges have changed dramatically over the years. We’ve gone from a floor to an electronic trading platform. How has the development of technology affected what you do today?
That evolution was a really traumatic experience for a lot of market participants. What you saw was that the market participants who were comfortable taking risk, and providing meaningful liquidity, made the transition successfully. Obviously we’ve had to adapt the way that we allocate resources and we certainly have a lot more resources devoted to technology than we did five or ten years ago. It’s created a whole new set of opportunities. But certain inefficiencies that existed in the Eurodollar futures pit are just no longer there. The markets in many regards have become more efficient through the evolution.
Is that a function of more participants using those markets and tightening the spreads?
Absolutely. When contracts are trading on the floor, there are only so many people who can physically stand in the pit. Now I talk to people who have offices in India and Prague, and all over the world who are now able to access these markets on a level playing field. So of course the competition is greater than it was before.
What are your thoughts on high-frequency trading, and what has that meant to the futures industry?
There’s obviously a lot of discussion about high-frequency trading. One of the things that I remind people is that when I stood in the Eurodollar options pit on a busy day I would do so many trades that I couldn’t even write them down on the trading cards fast enough. I’d jot down a strike price or a price of the option, and then come back to it after 15 minutes and fill the cards out. So is that high-frequency trading? It’s doing a lot of trades in a short period of time. Of course, the high-frequency trading people talk about now are trades that are generated by computers. But to me it’s not a new thing. Frankly, I am somewhat confused about it. To me, applying computers to that problem is just a natural evolution of the marketplace.
We’re obviously in the middle of a huge regulatory overhaul in futures markets. Some rules haven’t been finalized yet. But what are you most focused on with Dodd-Frank?
The main aspect of Dodd-Frank that I’m focused on is one of the areas that is based on an accurate premise, which is that you can reduce systemic risk by moving trades away from bilateral, you know, uncleared relationships and into clearing houses. I see that as a huge opportunity for both DRW and CME. And historically we’ve always been very frustrated by the fact that we could only access the interest rate swaps market as a customer. We could only access the swaptions market as a customer. And yet a lot of dealers who provided liquidity in those markets would then come and lay them off in the futures markets. So we’re really excited about the evolution that’s going to take place as a result of this. And we’re working on lots of different initiatives to try to position ourselves to benefit from it.
What other opportunities might it create for a firm like DRW that you didn’t have before?
The rules around DCMs are much stricter than the rules around SEFs. But, you also get some significant benefit by trading futures. For instance, the margin requirements will be higher for most cleared swaps than for futures.
So I think that there will be a whole host of new products that will be introduced that will capture a lot of the demand for risk mitigation that is currently served by the OTC swaps market. One of the projects that we’re involved in is the Eris Exchange, which clears its trades at CME Group. Eris has a futures contract, an interest rate swap futures contract that’s economically equivalent to an OTC swap, but you can trade it as a future. I think that there will be opportunities to do similar things in the credit market. We’re working on a project in variance swaps, wrapping them as futures. So I think that there will be lots of opportunities in that space to access markets as a liquidity providers that historically have not been available to us.
Let’s project forward a little bit. Things have changed in a lot of ways, but what’s ahead for futures markets?
I think the evolution will be driven by Dodd-Frank, and in part also driven by concern about credit risk as a result of the turmoil in Europe. In general, I think this will cause a growth in volumes, and a growth of new products. And since our business is generally driven by volumes and volatility, itwill create expanded opportunities.