How do they operate?
The most common model for a trading arcade is a trading room where a trader can lease a seat, trade for his own account at reduced commissions, and often split the profits with the house in return for additional funding.
A "seat charge", which can range from $1,000 to $6,000 per month, includes some combination of market data, analytic package, connectivity and order routing technology. The most common offering is a high performance order entry system with sophisticated trading tools, market data and news services.
Arcades often will offer an individual trader some degree of leverage based on how much he deposits of his own money and how much profit he is willing to give up. Typical new traders deposit $10,000 and get an additional $50,000 in margin in exchange for a 50/50 profit split for a two-year lock-in deal. More experienced traders may be able to negotiate up to 70% of profits with no funds on deposit.
Electronic trading firms have been springing up since talk of the demise of the trading floors began more than a decade ago. When the then-Deutsche Terminborse launched its trading platform in the early 1990s tech savvy traders took notice. As more contracts became available electronically, e-trading firms began to crop up, mostly in London and Chicago, but it wasnâ€™t until LIFFE shut down its trading floor in 2000 and launched Connect that they became more of a force in the marketplace. Not only was a new platform available to traders, it was the first "open" architecture system that allowed independent service providers and brokerage firms to develop their own front-end order routing technology. In addition, a whole community of sophisticated traders was on the street looking for a way to salvage their livelihood and duplicate some aspects of the floor trading environment.
History is repeating itself in Chicago where, although the floors have not closed, the number of e-trading firms has grown in volume and influence over the last five years as the liquidity in the major contracts has moved online. While there is no reliable data available to the public on the share of the futures trading that these firms represent, anecdotal evidence suggests that it is significant. In fact, some of these firms say their daily volume across markets exceeds the total daily volume of any one of the four big futures exchanges. Euronext estimates that independent traders, its term for individuals and firms trading for their own accounts, make up about one-third of the entire universe of people trading on its Connect platform, and account for as much as 50% of the volume in its short-term interest rate contracts.
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