Cantor Exchange President on API Traders, U.S Regulations and More

Finance Magnates spoke with Rich Jaycobs, President of Cantor Futures Exchange, for his perspective on the firm’s mission, its relations with the binary options industry and other related companies. The first part of the full interview can be read below, with more to come next week.

Please tell me about the purpose of your visit to Israel

I was interested to learn about how binary options work outside the U.S. so I took two trips to Israel and visited with about two dozen binary option brokers and technology providers. These companies do not operate in the U.S because U.S. regulations require binary options to be traded on a designated exchange like Cantor Exchange. Two companies in particular, SpotOption and TechFinancials, had immediate interest in making their binary option trading technologies available to Cantor Exchange. Both companies have technology that is specifically designed to appeal to binary option traders and – with a few modifications for the U.S. market – formed the basis for Cantor Exchange’s Independent Software Vendor business model.

Our goal is to sign up as many technology providers as we possibly can. We also want to sign up as many API-connected traders as we possibly can. And we want to encourage companies interested in marketing binary options in the U.S to become NFA members so that they can join our Referring Participant incentive program. Outside of the U.S., these functions all tend to be provided by one company, but in the U.S. these functions are kept distinct with different rules for each.

When you say API Trader are you referring to a market- making broker?

Cantor Exchange doesn’t recognize any company as a broker, and we don’t recognize any company as a market maker. We make our API available to anyone that wants it and joins Cantor Exchange as a Participant. This includes retail traders, the firms mentioned before and other firms we did not mention. Anyone that wants to be connected to us electronically and make prices to the market may do so. Because everyone has equal access we think we have a very good and very fair model. No one has an advantage, no one is the broker. Everyone that joins Cantor Exchange has equal access.

What’s the legal process for non-U.S traders?

The U.S rules allow non-U.S. traders to trade on our exchange. We are currently looking at what the rules are in local jurisdictions for non-U.S traders. So depending on what country the non-US trader comes from, we are looking to see if that country’s rules permit traders to access Cantor Exchange. In other words, there is no U.S prohibition against non-U.S. traders joining Cantor Exchange and non-U.S. traders sign up the same way a U.S. person signs up. However, if a trader is a non-U.S. trader we have to make sure that it is legal for us to allow that trader to trade from his home country.

So making Cantor Exchange accessible internationally is not a U.S. issue. However, we need to confirm each country that permits their traders to access our market. Right now, we don’t accept any non–U.S. traders just for that reason but we are working to confirm the rules in each country. For example, the rules in Israel are changing this May and we are looking at what we need to do to be compliant to accept Israeli traders.

How many countries do you have right now in your sights?

Only the U.S is permitted right now but we are examining at least two dozen countries, most of which are English speaking countries. We are also looking at a number of EU countries and are still sorting through the legal issues there.

What is the need for adaptation of the non-U.S model for the U.S market?

The most obvious difference is that our market has strike prices like options in a stock market whereas the non-U.S. model only offers at the money option. This is sometimes called a ladder market.

Another difference is that we require that all technology providers enable traders the opportunity to offer their own prices for the options. The non-U.S. model doesn’t allow customers to enter their own prices to compete with Market Makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term.

There other differences. For example, Cantor Exchange makes sure that every trading interface connects directly to the exchange so that no one but the customer and the exchange can see their orders until it is actually executed. We also have other rules that relate to fairness in the market, and we have to test for compliance with those rules.

So a retail trader can write his own options?

Correct, if he wants to write options he can write options instead of just buying them. Exactly like writing a stock option, just with a different pricing model.

So if I am writing an option using a platform developed by SpotOption is that going to all other traders on the Cantor exchange?

Correct, every order is available to every trader. If a retail trader puts in a price, that price will be shown to all other traders no matter if the other trader is using a SpotOption GUI, a TechFinancials GUI or a TRADOLOGIC GUI. Everyone sees all the same prices and no one gets any inside access to deal exclusively on a price.

There is no guarantee that a price will be available to trade on, that’s the other side of the equation. Since everyone has equal access and we don’t give any company special privileges to make prices, we can’t guarantee that a price will always be available. But when traders do see a price, they know that it’s an open and competitive price and can trade on it, or they can put in their own price.

How do you view the regulatory position of Cantor Exchange?

We are what’s called a self-regulatory organization. We are an exchange. Most people will think of us as an exchange like the New York Stock Exchange Stock Exchange A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin Read this Term. As an exchange we provide a platform, we monitor the market, we work with the regulators to ensure the fairness of the market, we validate all the technology platforms, we make sure the trading that people are doing is fair and we make sure there are no illegal activities (like money laundering) taking place. We have a whole range of regulatory responsibilities – that’s our mission.

Like other exchanges, our role is to allow customers to become Cantor Exchange Participants and place orders and trade directly with other members of the exchange. That’s the business model.

Separately, as I have said before, we strongly encourage technology providers to connect with us so their platforms can be used for trading. We think different platform providers present different ways of trading that Cantor Exchange traders would like to use. For example, right now there is an iPad app that shows a very traditional options market view. But we also have the platform that SpotOption developed which shows a very different display of market information that appeals largely to binary options traders. And when released the TechFinancials and TRADOLOGIC trading interfaces will all have their own ways to display information that their customers prefer. These firms are not brokers and they are not market makers, they are technology providers offering tools for Cantor Exchange traders to use when placing orders into the market.