(Bloomberg) -- The futures world was buffeted in recent days with news of workforce cuts, and industry veterans say more may be on the way as smaller firms are squeezed by a few giants that dominate the $30 trillion market in Chicago.

The reductions at high-frequency firms XR Trading and Allston Trading LLC may be a harbinger of more consolidation to come, said Chris Hehmeyer, chief executive officer of Hehmeyer Trading & Investments. He said technology costs are prohibitive for smaller firms, part of an environment that’s testing the ability of startups to survive.

“It makes it hard and challenging for the smaller players to continue to play the game,” said Hehmeyer, a board member of the Futures Industry Association for more than a decade. The job cuts “seem to be part of a broader trend, and it looks like we’re about to see another wave.”

XR Trading let go about 20 people late last year, or about 10% of its headcount. Last week, Allston cut about 25 positions including traders and support staff, or 20% of its workforce. The firms are among those pushing to compete with giants including Jump Trading LLC, Optiver BV, IMC Trading BV and DRW Holdings LLC.

Chicago has been the futures trading capital of the financial world for more than a century, with storied markets like the Chicago Board of Trade and Chicago Mercantile Exchange setting the pace for how derivatives are bought and sold around the world. Yet a tough startup environment coupled with low volatility and rock-bottom interest rates is making a mature market show its age.

The economics aren’t just hitting traders -- banks that support them have pulled back, too. At the end of 2019, 54 bank units, known as futures commission merchants, serviced derivatives traders, according to data compiled by the FIA. That’s down from 100 in 2004.

Cryptocurrency Shift

To be sure, there are other signs that the industry still thrives. The amount of customer money held by FCMs is near its all-time high of $215 billion, according to FIA data. But Hehmeyer said the activity that once characterized futures brokerages around the city has shifted to newer, more expansive markets like trading in cryptocurrencies.

One big burden for the industry is the years-long drought of volatility. Trading firms, and most notably high-frequency trading firms, rely on markets to move so they can sell to buyers and buy from sellers.

“It’s really tough to make money,” said Rocco Chierici, senior vice president in the fixed-income group at RJ O’Brien. “We need volatility.”

A firm like RJ O’Brien enjoys at least one advantage: its strong customer base. Chierici said he offers his customers services such as education on new markets and new ways of thinking about trading. “We’re jokingly the cradle-to-grave guys,” he said about keeping up customer relationships at the firm.

A contrasting picture emerges with proprietary firms such as Allston, which use their own money for trading. When the markets get tough, they have nowhere to turn.

Chierici said he sees fewer players in the Chicago futures market in the months to come. “There is more consolidation in the offing,” he said.

To contact the reporter on this story: Matthew Leising in Los Angeles at mleising@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Dan Reichl, Steve Dickson

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