Wall Street’s most sophisticated, high-speed traders are growing hot on fintech investing. Execs from 5 firms explain how they find their best investments.

DRW

Electronic trading firms, known for their ability to quickly move between positions, have shown an increasing interest towards fintech investing.
Some firms have gone as far as setting up completely separate funds to make deals.
Business Insider spoke to executives from five electronic trading firms about their strategies towards fintech investing.
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They made a name for themselves early on for their ability to move in and out of positions in fractions of a second. However, Wall Street’s most sophisticated traders have taken a much longer view on some of their investments in recent years.

Electronic trading firms that have grown in prominence over the past few decades with the electronification of the financial markets have set their sights on a new target: Fintech investing.

Venture capital firms have long viewed fintechs as great investment opportunity. VCs poured $11 billion into fintechs in 2018, the most in eight years.

However, electronic trading firms bring a unique skill set to investing that venture capitalists can’t compete with. As some of the most active traders on Wall Street, market makers can prove to be a powerful strategic partner for young companies looking to make their mark.

The motivation behind the high-speed firms making investments varies. Some view it as an opportunity to get in on the ground floor of growing trends, such as cryptocurrency or blockchain technology. Others want a seat at the table of companies they feel could play a critical role in the markets they operate in.

For some, it’s as simple as an alternative way to invest money earned from the core business. The investing arms can, in some ways, serve as a quasi family office for the founders of the successful trading firms.

Business Insider spoke to five trading firms to get a sense of how they approach fintech investment.

Jump Capital

Number of investments: 59

Notable investments: Personal Capital, TradingView, BitGo

Key people: Michael McMahon, managing partner; Sach Chitnis, managing partner; Peter Johnson, partner and fintech investments lead

Strategy: Michael McMahon and Sach Chitnis were both looking to raise a venture capital fund in 2012 when they were introduced to Paul Gurinas and Bill Disomma, the founders of Chicago market-maker Jump Trading. Gurinas and Disomma just so happened to be interested in getting in venture investing. A partnership was formed, creating Jump Capital.

Seven years later, Jump Capital has made dozen of investments in startups focused on enterprise software, fintech, IT infrastructure, and digital media. The firm’s investments range in size between $1 million and $15 million, with the majority landing between $5 million and $10 million.

"Our goal is to make smart investments in promising entrepreneurs, add value to those investments beyond capital, and scale businesses," said Peter Johnson, a principal at Jump Capital who leads the firm’s fintech investments. "We have a broad investment mandate, so we are not constrained by a corporate parent and furthering their initiatives."

Originally, Jump Capital’s focus was on startups in the middle part of the country, leveraging the company’s Chicago roots. However, eventually the fund expanded to the coasts, making investments in New York- and San Francisco-based companies, among other places.

And despite having the backing of one of the most-active trading firms in the world in Jump Trading, deals aren’t always made because of potential strategic partnerships. Some investments do offer the opportunity for Jump Capital’s parent company to participate, such as the one made into the Small Exchange.

However, Johnson said a majority of startups the fund invests in aren’t related to Jump Trading’s business at all. Other companies Jump Capital has backed include ParkWhiz, which allows people to reserve parking spots ahead of time, and Gauss, which monitors surgical blood loss in real time.

Johnson said that speaks to Jump Capital’s independence.

"A lot of corporate venture funds, their number one goal is not to make money. It is to serve their corporate parent," he said. "We are here to make money. If we did not make money, we failed."

DRW Venture Capital

DRW

Number of investments: 27

Notable investments: ErisX, OpenFin, Pico

Key people: Kim Trautmann, head of DRW Venture Capital

Strategy: Market maker DRW decided to jump into the fintech investing game in 2016 with the creation of DRW Venture Capital, which focuses on financial and enterprise tech. The project was led by Kim Trautmann, who’d previously spent close to a decade on Goldman Sach’s Principal Strategic Investments team, where a majority of her focus was on making fintech investments.

At Goldman, Trautmann invested in companies the firm had a strategic interest in. That experience has come in handy, as DRW Ventures takes a similar approach. Despite the alternate branding, the investing arm is not a separate subsidiary of DRW and works hand-in-hand with its parent company.

Every investment made by DRW Ventures isn’t necessarily into a startup offering products or services DRW can use, but the focus is areas of the market the trading firm knows best and can add value for the company, even if it’s not as a client.

"We are working very closely with our whole firm to leverage expertise across the organization to make our investments," Trautmann said. "We mark our portfolio. We have a P&L. But we’re working very closely with the organization to consider investments and bring value to that company."

DRW Ventures considers itself ‘stage agnostic’ in terms of the startups it focuses on. Instead, it filters companies by revenue, only considering those that have eclipsed the $5 million mark. Initial investments are typically $5 million, and the group makes about two new deals a year.

Trautmann said the thinking behind considering only companies with at least $5 million in revenue is due to the fact DRW believes it can offer the most value to companies that have some degree of scale.

The firm’s decision in general to get involved in venture investing also speaks to how its grown since DRW was first launched in 1992 by Don Wilson, who had previously spent time as a floor trader.

"This strategy was the natural evolution for our organization," Trautmann said. "The opportunity to invest in fintech is large. We’ve seen more corporate venture firms generally engaging in this space as well. And I think that just speaks to the opportunity for people to invest in what they know and the fact that the opportunity set is large."

Virtu Financial

Number of investments: 6

Notable investments: Members Exchange, ErisX, Equiduct

Key people: Douglas Cifu, CEO; Joseph Molluso, CFO; Andrew Smith, head of corporate strategy, investor relations and communications

Strategy: Virtu Financial is no stranger to deals, having made a string of acquisitions over the past few years. There was the purchase of KCG back in 2017 for $1.4 billion. Then came ITG, which the market maker bought in 2018 for $1 billion.

Yet, when it comes to making investments in startups, the company isn’t as eager to throw its hat in the ring. Many of the startups Virtu currently holds investments in are carryovers from companies it has acquired.

Andrew Johnson, head of corporate strategy, investor relations and communications at Virtu, said the company has always been clear with shareholders that funding for the business is typically spent to pay down debt, do buybacks or offer dividends.

"There is no, ‘Well that’s a good idea,’" said Andrew Johnson, head of corporate strategy, investor relations and communications at Virtu. "We review investments for their strategic value. We’re not only looking at these for an economic return. We’re not a private equity firm."

With that being said, Virtu isn’t completely opposed to make investments when it feels there is a strategic opportunity. Most notably, Virtu was one of the nine founding members in the Members Exchange, a startup exchange that was meant to be Wall Street’s answer to what it feels are rising fees at traditional exchanges.

In some case, investments have also provided an opportunity for Virtu to get into a new business. The firm already had a stake in the Eris Exchange through its KCG acquisition. When the exchange announced plans to get into the crypto space, and an original investor wanted out, Virtu jumped at the opportunity to get involved.

"It is more what is strategic for our institutional clients," Johnson said. "If we see something where that is a great opportunity and we should help that grow, or us being more involved is better for us or our clients as a whole, not just the financial return."

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