The Hot Action in Financial Tech

OptionsXpress and a slew of other small outfits are springing up around Chicago's exchanges

by Stuart Luman

When optionsXpress (OXPS), an online brokerage firm, was launched in late 2000, the timing was atrocious. The tech-centric Nasdaq market was tanking, and early-stage funders of dot-com startups were running scared. The company's founders, three Chicago options traders, were roundly rebuffed by venture capitalists, forcing them to raise their first $3 million on their own, from friends, family, and other traders.

That forced them to spend modestly. They also didn't feel pressure from VC financiers looking to cash out in a quick initial public offering. Today, optionsXpress Holdings is a publicly traded success story with a market value of $1.6 billion, nearly $250 million in annual revenue, and 250 employees. Yet old habits die hard. "We're still focused on using technology and local resources to be extremely efficient," says the company's 38-year-old chief executive, David A. Fisher.

OptionsXpress is one of many tech-focused trading and financial-service firms that have fed off Chicago's world-leading exchanges to build a budding technology sector in what some still call the Rust Belt. Chicago isn't mentioned in the same breath as Silicon Valley or Boston. But in the trading world, Chicago's high-tech reputation is gaining ground, proving that the city can, indeed, move beyond the 20th century. In the process, optionsXpress and other online options brokers are opening up the byzantine world of futures, options, and commodities to the masses, creating more demand for technology.

Connecting Markets

Companies such as OptionsMonster, thinkorswim, and Peak6 all compete for a piece of the growing retail futures and options business. Others specialize on back-end technologies, which go largely unnoticed but are no less important. They include firm58, which makes post-trade settlement and accounting software, and Aleri, known for complex software that analyzes millions of pieces of market information per second and allows its customers, mostly banks, to react to changing market conditions in real time.

One of the larger Chicago technology outfits is Trading Technologies International, which builds high-end trading software and infrastructure connecting more than 40 global markets. The company says its software is used in half the trades made every day on the world's six largest exchanges.

Then there are the exchanges themselves, the Chicago Mercantile Exchange, which acquired the Chicago Board of Trade last year to form CME Group (CME), and the Chicago Board Options Exchange. They have become thoroughly dependent on cutting-edge technology and the techies who keep their sprawling international electronic financial systems humming 24/7. Last year, 79% of trades at the CBOT were done electronically, while the share at the CME was only slightly lower, at 76.6%. "Chicago is an unsung market as it relates to technology," says Fred Hoch, president of the Illinois Information Technology Assn.

Meager Venture Capital

Why Chicago? In addition to the exchanges, which form an essential foundation for startups, the city boasts a high-quality communications infrastructure. Companies usually share space in local data centers, allowing them to run a cable between servers located just feet apart, a notable advantage in connection speed and reliability over competitors spread out elsewhere. "You need really robust infrastructure, and Chicago's been great at that," says Fisher. "We have these deep tunnels in Chicago where they keep running more fiber. It's made it really easy for financial-service companies to get up and running."

All that great infrastructure doesn't mean much, however, if investors aren't willing to take a risk on a startup. In many industries, Chicago's newbies have it tough, because most big venture capital firms prefer to invest in California or in high-tech pockets such as Boston, where they know the players. The VC money going to Chicago companies is paltry—$520 million, a mere 1.8% of the national total in 2007.