Optiver-Binck deal threatens option market
In June 2008 the Dutch option powerhouse Optiver announced to team up with the biggest Dutch retail broker Binck to create their own marketplace. Retail clients of the broker would do all their option trading against Optiver, under the assumption of equal option quotes. Within the ruling of the MiFiD, the European markets directive, this is indeed possible and legal. Other market makers and option traders should be allowed to see and trade on Optiver’s quotes too – but not from the start.
Market makers cry foul
Dutch market makers cry foul, understandably. With almost half of all retail orders flowing straight in the books of Optiver, they would see the size of the remaining market shrink. Small transactions with private investors are generally most lucrative ans easy compared to trading complicated arbitrage against hedge funds. Without a large share of retail flow the liquidity providers won’t be rewarded for quoting tight markets. Optiver will be able to copy all quotes from the market and present it as their own, and doesn’t even need to improve the quote.
Short run benefits
In the short run the Optiver-Binck deal would benefit the clients – as transaction costs will possibly be reduced. As I said before the losers would be the other market makers, but nobody will miss them anyway. Major players such as All Options and IMC may point their focus on markets outside Euronext. The future of the remaining market makers doesn’t look very bright. Sending tight quotes without trading is difficult and not rewarding. With a monopoly of Optiver option quotes of the rest may even widen – if they survive at a all. A lack of price competition may have foreseeable consequences. Optiver isn’t exactly afraid to exercise some market power.
Legal
On the other hand, the Optiver-Binck deal is probably legal. And without doubt Optiver is one of the most advanced Dutch market maker anyway, capturing a lot of market share without broker-deals worldwide. And although competition is generally fine for markets, it would be hard to imagine a market with seriously wider bid-ask spreads – that’s just not the way the world works.
Approved by competition watchdog
The Dutch fair competition body, the NMa, doesn’t see any problem and approved the alliance this week. The Dutch security market watchdog AFM will still have to make a decision on the subject. Other market makers will try their best to block the deal with legal procedures. It’s the only chance the have.
(Yes, the picture in this post actually has a distant link to this topic. It’s from a hilarious advertising clip from Optiver Australia:)
Do you got more assumptions?? (Optiver is the most advanced Dutch market maker…)
If a Binck-customer wants to buy a “computer”, lets put Microsoft-Windows on it, and make all the competitors’ software not available.
what?
If the Binck flow will be exclusively routed to Optiver, I have also no doubt that the now widened quotes on Euronext, merely copied by Optiver, would further improve Optiver’s P/L.
The argument then surfaces whether this would seriously damage the market. The, in recent months, shrunken institutional flow combined with the reduction of Dutch retail flow by internalizing, will do more than just damage the market. There is the risk of killing the competition altogether, cascading into a further deterioration of pricing.
I do not get your conclusion that ‘transaction costs would come down and clients would benefit’. With now equal or wider spreads and mor importantly exclusivity, why would broker fees be lowered? If you are already the (or close to) cheapest in the market, you sit on it until someone breaks you. What force could in the short term make them reduce commissions?
I am also not so sure whether the ‘probably legal’ argument will fly. Being a systematic internalizer requires a firm to be counterparty to every trade. Clearly, Binck is not. Optiver is, or perhaps, and even worse, a new platform owned by both.
Perhaps on its direct merits and in the competition spirit of MiFID, the NMA see this development as market forces at play. In my view, a shortsighted approach which bypasses the importance of retail in the Dutch model.
So, it appears that we are stuck with two possible solutions.
Either the AFM would come to the rescue on the basis that this set-up is illegal i.e. not compliant with MiFID. This would require guts and a deep understanding of the dynamics of its own(derivative) market.
Or, a combined effort of the large remaining market makers and flow providers to copy and improve Optiver’s initiative: Find a ready to use platform, add a chapter to its rule book, passport that licence into the Dutch market, copy Optiver’s (with a slight improvement)pricing and off you go!
Not a solution perhaps, but certainly an ‘easy win’ and possible deterrent, Euronext could come to its own rescue and drop the fee for client transactions to the prop level.
Great comment, I’ll copy it to the main page.