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The future of Chicago tech involves options traders in their underwear
When Jon Najarian walks into a room, you can tell where he’s been in his life. His handshake testifies to a brief stint as a linebacker for the Bears in 1981. A silver skull ring the size of a half-dollar smacks of the bravado of the pit trader, as Najarian was for much of the eighties. Now a frequent commentator on CNBC’s Fast Money, he has the minor celebrity’s habit of greeting strangers by name, a tendency that’s both warm and a little confusing.
There is, however, one piece of the puzzle that doesn’t fit. Najarian looks to be more comfortable in a Brooks Brothers suit than a hoodie, and at 56, he’s old enough to be the father of the throngs that crowd startup incubators like 1871. But Najarian is at the helm of one of the most successful tech startups in a city that’s starved for happy stories about Internet companies not named Groupon. TradeMonster, the options trading platform and brokerage that Najarian cofounded, just celebrated its fifth birthday.
Its numbers are impressive: over the last four years, TradeMonster has seen average year-over-year growth of 264 percent in accounts and 164 percent in revenue. So are the accolades: a four-year reign in Barron’s rankings of options trading platforms, and second overall in the industry’s definitive ranking of online brokers, beating out Goliaths like Charles Schwab and E*Trade. They have accounts in 36 countries.
If you felt a little sleepy after reading that last paragraph, that might be the reason you don’t often hear about TradeMonster.
“[Brokerages like] TradeMonster or Optionshouse, that’s not as cool as going to work for Grubhub, even though it’s a better business model and a proven business model,” says David Kalt, who cofounded the options trading brokerage OptionsXpress in 2000 and sold it to Schwab in 2011.
Fred Hoch, CEO of the Illinois Technology Association, is more blunt. “Options traders are at home in their underwear, trading their options,” he says. “It’s not sexy.”
As the emphasis in Chicago’s tech community moves from scoring funding to turning a profit, TradeMonster could provide a roadmap for how the city can use its past industries to inform its future. And few industries loom larger in Chicago’s history than the pits.
“Big picture, what TradeMonster did was they took demand, and paired it with a hundred years of expertise — trading pork bellies and trading options are not that different — and said, we’re going to apply technology to it and do it in an innovative way,” says Hoch. “If I look at Chicago and ask how are we going to succeed, it’s taking the ten industries, where we have that expertise and bringing them together with technologists. If we stick with our knitting, we can kill those fields — we don’t just have to be a player.”
When TradeMonster cofounders Jon Najarian and Dirk Mueller were scouring for investors in 2006 and 2007, they actively sought the sort of institutional knowledge that’s been building on LaSalle Street since before the Great Chicago Fire.
“The money was one thing,” Najarian says. “But if we could get people with knowledge and money, that’s much more valuable than just getting [funding]. We wanted the understanding of the business.”
Of course, most entrepreneurs don’t have access to the kind of capital that Najarian and Mueller were able to find after years in the finance industry. Mueller says that when TradeMonster broke even in spring 2009, it had spent $30 million building out the platform.
But there are parallels between TradeMonster’s story and that of the bootstrapped startup. Chief Technology Officer Sanjib Sahoo’s team used open-source software; costs could have quadrupled, he says, if they’d used commercial licenses. When, two weeks before the brokerage was set to launch, Lehman Brothers collapsed, the founders chipped in from their savings to keep TradeMonster on schedule. And there are the war stories: sleeping on the floor, showering at the gym, working four months without a day off.
TradeMonster is both an exemplar for the tech community and a cautionary tale about the necessity of innovation, even in fields where Chicago has traditionally reigned supreme. While Najarian managed to climb out of the pits and make the move to electronic trading, thousands of his compatriots have been left out in the cold.
Mike Gorham, a professor at IIT and member of the board of directors at the CBOE, chronicled the often painful transition in his 2009 book, Electronic Exchanges: The Global Transformation from Pits to Bits. When describing the human toll, Gorham cites a scene from Floored, a 2009 documentary about pit traders whose jobs have been wiped out by electronic trading.
“You can see it, people who are so pissed off that the world has changed on them,” Gorham says. “One guy says I hate computers, and he hates them because he had a wonderful living yelling and screaming on the floors, and of course that doesn’t work anymore. Tons of people just didn’t have a chance.”
Much of that carnage has been a matter of necessity. Nevertheless, the TradeMonster story points to the opportunity that the floor-trading diaspora has to wed its expertise with innovation. When asked about why he was able to make a move that so many weren’t, Najarian turns somber.
“Nothing focuses the mind like the gallows,” he says. “I’m not happy that so many of our compatriots can’t earn a living at all hardly anymore. I hope we can do something to keep them in Chicago, because that’s a lot of good, talented people, good wage earners you’d rather not lose.”
ABOVE: From left, TradeMonster’s President, Jim Swartwout, cofounder and CEO Dirk Mueller, CTO Sanjib Sahoo and co-founder Jon Najarian.