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FIA Member Spotlight - The Small Exchange

Launched in 2020, the Small Exchange has prioritized serving retail futures traders

14 July 2021

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The launch of a new derivatives exchange is noteworthy under any circumstances. But the 2020 debut of the Small Exchange is particularly interesting considering the company's mission of serving smaller retail futures traders was right in time for the "meme stock" mania that descended on markets last year.

Retail trading has certainly been in the spotlight over the last year or so, but President and CEO Donnie Roberts is quick to point out retail trading in capital markets is hardly a new phenomenon. In fact, he and his colleagues worked so hard to launch the Small Exchange in response to long-term trends that began with the democratization in stocks and then equity options markets over the last two decades.

"Leveling the playing field for smaller investors and allowing them to mind their own money, that's something we all feel very strong about," Roberts said.

The Small Exchange is registered with the US Commodity Futures Trading Commission as a designated contract market. Clearing and settlement is provided by OCC and Eventus has partnered with the firm on trade surveillance. The Small Exchange has partnered with a substantial and growing list of brokers including tastyworks, Interactive Brokers, Phillip Capital, ABN Amro Clearing, Citadel Securities, CQG, Jump Trading, Kore Trading and Wedbush to connect individual investors with its "Smalls" family of futures products.

Roberts also points out that the Small Exchange built its own infrastructure from the ground up, from its matching engine to the risk management system, "to reflect the current market and make sure our technology was not only best-in-class at launch but that it was built to last and evolve to meet future customer needs."

As for its products, they are designed to be "small, standard, and simple," Roberts said. All of the Smalls move in ticks of 0.01 increments that equal $1 in market value, and have uniform expiration on the third Friday of the month. Present offerings span asset classes including stocks, bonds, commodities and currencies. And perhaps unsurprisingly, these futures products have rolled out based on what retail investors tend to be most interested in -- from Small US Crude Oil futures, to new product launch that include Small S420 Cannabis Equity Index futures that debuted in July with plans to offer more product on a continuous rollout.

Creating products retail customers are interested in is important, Roberts said, but the Small Exchange also believes strongly in providing a support system for these traders, too.

"Efficient and cost-effective access is part of it, but it's also about financial literacy tools and research and education so these investors can succeed in the market over the long term," Roberts said.

This philosophy is part of the Small Exchange DNA, Roberts said. He points to his prior experience as COO of equity options education and trading platform thinkorswim, which boasted roughly $8 billion assets and 100,000 clients who traded an average of 450 times a year at the time of its sale to TD Ameritrade for $606 million in 2009. Co-founder of thinkorswimTom Sosnoff is also Chairman and co-founder of the Small Exchange, and shares in what Roberts calls "a decades-long mission to better connect self-directed investors with capital markets.

There's nothing wrong with a certain amount of speculation, he adds, as speculators are an important part of making any market "liquid and whole." However, it's also important to create a welcoming environment for smaller investors who are not interested in aggressive speculation and simply want to use futures as hedging tools or more modest investment vehicles. That includes the smaller and more accessible contract sizes, but also a membership program to further reduce fees on the exchange and eliminate market data charges.

"We want these retail investors to become sustainable customers, and to become regular and long-term participants in our markets," Roberts said. "Everyone benefits if we help these self-directed investors engage successfully with futures markets."

Beyond the next generation of retail traders, the Small Exchange is also thinking about how to bring other market participants onto its platform, too.

"We're really interested in partnering with more market makers and proprietary traders, and even to get into the advisory space someday because we think our products are very suitable and capital efficient for small to medium sized investment advisors," Roberts said.

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