DeGiro : clients as counterparty for hedgefund
This is shocking news. The discount broker DeGiro has been executing client option orders against their own hedge fund, HiQ. These option trades have been matched inhouse, which means the retail clients effectively have traded over-the-counter options against DeGiro.
And these “OTC” options means you run counterparty risk, the options are only guaranteed by DeGiro instead of a Central Counterparty like Clearnet (used by Euronext).
This internalizing happened without clearly informing clients. Retail investors are unaware they may have done option trades against DeGiro instead of safely cleared by LCH.Clearnet on Euronext. There’s no opt out possibility. This can be devastating for the markets, and implies a lot of extra risk for investors. Finally, this seems to be the “catch” for the low fees at DeGiro.
Solid Evidence, and confirmed
A friend at a market making firm ran into this “inhouse matching” by complete accident. On August 19th he wanted to buy a few Dec’15 20 puts in Ten Cate for his private portfolio. The offer in the screen was 7 cents for 25 contracts. He made a bid for 50 contracts at 7 cent. He was curious if he could get the full 50 lots, so he paid more attention than usual at the execution. You would expect the trade of the 25 lots at 7 cent, and bid on for the remaining 25.
He did receive a full fill, immediately. But nothing traded on the screen. The offer for 25 contracts remained untouched. I have proof of the trade. He bought 50 contracts, but no contract traded on the exchange in this serie all day. After bugging the helpdesk for a few days, they reluctantly revealed the trade was done against a “related company” from DeGiro. They confirmed the trade was done off exchange (screenshot of e-mail, in Dutch). In position overview the put is classified under the Euronext code (“LIF”, from Euronext Liffe), just as any other regular option. In transaction overview nothing is mentioned about inhouse matching.
Clients tricked in OTC trades against DeGiro
This means clients who think trade options with a central counterparty involved – actually have exposure to DeGiro. And DeGiro isn’t exactly a bank with triple A rating. Their sister operation hedge fund HiQ has been taking massive losses.
Basically, when your option order is matched against HiQ you end up with a contract (a “bet”) guaranteed by DeGiro. Eventually it may be possible for retail clients to trade options against other retail clients off-exchange. But what’s the value of such a contract, when it’s guaranteed by a firm with unknown financial safety?
Hedgefund HiQ is on other side of the trades
The latest strategy update from the sinking HiQ says they plan to move to more traditional market making strategy with human traders. They hired ten (10!) junior traders. Ditching earlier quant strategies. This market making strategy, what could it be? After the massive losses, hedge fund HiQ suddenly appeared to be making a bit of steady money again. HiQ is on the other side of retail trades. DeGiro spokesman Gijs Nagel confirmed HiQ can (and did) trade against the retail investors of DeGiro.
From the trade in Ten Cate options, it’s clear the hedge fund HiQ has more possibilities to trade than regular customers. They apparently are able to trade more size than visible in the screen. Other customers can’t hide their size behind an iceberg. Chances are HiQ is joining every market quote in the option market in a stealth mode – nobody in the market can see they did a trade at all. Easy hedging,
Client is counterparty instead of customer
When the broker trades against his clients, this means the clients aren’t really paying customers but counter-parties to trade against. Suddenly you’re broker isn’t your best friend anymore. Doesn’t take much fantasy to imagine conflicts of interest.
For example, you had a margin call and you are forced to buy back a bucketload of certain puts in a stock. And hedgefund HiQ knows about your margin call. When a shark like a hedge fund is in bed with your broker, it’s time to get out.
Don’t set the fox to watch the geese
Easy to think of a dozen other strategies where hedge fund HiQ and broker DeGiro together take advantage of the client orders. Suppose the hypothetical situation the hedge fund has an early view of the incoming retail orders – because they do trade against incoming option orders. What makes them decide to trade against which order? How much time do they get for such a decision? Can they see account details before they trade? (A bid from the guy from Amsterdamtrader? Yes, sell him any size!)
Can’t imagine the AFM (financial watchdog in the Netherlands) would allow such a partnership between a broker and a hedge fund. Above scenario’s are hypothetical, but for sure you don’t want to set the fox to watch the geese.
Devastating for the market
If market makers have little chance to do the good trades on their quotes, making markets is unreasonable. Risk is even more market makers will throw the towel. Who would quote options when you’re only good as a hedge for trades HiQ doesn’t want to keep? Spreads widen in less liquid options classes, and in the end the clients end up paying a lot more for the executions.
To make things worse, these trades matched inhouse against hedgefund HiQ aren’t visible for the rest of the market. When a retail client buys a bag of atm puts in a stock, the hedge fund can hedge their trades easily because nobody has seen the first big trade at all.
DeGiro acting as Central Counter Party
Internalizing of stock orders isn’t such a big deal. Ownership changes hands. On the other hand, options contracts are basically a kind of bets. A bet placed at a reliable exchange with a clearing behind it, is something else than a bet made with a broker / hedge fund with unknown reliability.
Option trades executed on the exchange are guaranteed by the Central Counterparty (CCP). This CCP guarantees all obligations are met. This ensures one doesn’t need to worry the other side of the trade will be good for the money. In this option trade in Ten Cate options, the retail investor has got a long position of 50 lots. The other side has got a short position of 50 in this put.
Positions of DeGiro are held at ABN AMRO. But at ABN AMRO there’s no such long/short position in this Ten Cate option in DeGiro’s account. If DeGiro doesn’t clear this trade somewhere else on a regulated market, it is acting as a Central Counterparty. To act as a CCP you need a license from EMIR (European Market Infrastructure Regulation), which is very hard to obtain. DeGiro won’t have such a license. Not my field of experience, but this certainly looks like a major problem. DeGiro wasn’t able to respond to my questions on CCP.
Is it legal?
There seems to be a legal window of opportunity to start inhouse matching of option orders. Under MIFID a Systematic Internaliser (SI) can match orders of clients and act effectively as market maker. However, this comes with the obligation to be transparent about the price of execution. What was the price before and after the trade?
When MIFID II kicks in in 2017, such internalization of option executions won’t be allowed for SIs anymore. In other words, this window of opportunity will close in 2017. It’s beyond me why DeGiro would grab this temporary easy money and hurt the reputation. Either way, it will currently be illegal to internalize these trades without explicitly informing the clients. To act as a Central Counterparty without a license is probably not allowed either.
Popcorn time for Binck
It wasn’t too long ago when Binck (and to lesser extent, TOM) were taken under fire by DeGiro. The high frequency trader Virtu could frontrun some stock orders from Binck due to a sloppy stock order router. It’s ironic you could say, the tables are turned.
Disclaimer
I had the opportunity to ask a few questions to DeGiro’s spokesman. Unfortunately, he did not react to the second set of questions. The regulation on EMIR, CCP and MIFID isn’t my field of expertise.
There are two conflicts of interest for me, first of all DeGiro has been a reliable advertiser on this website. The other conflict of interest comes to internalizing of option retail flow. As active derivatives trader developments as internalizing option orders could (eventually) hurt my income.
Reaction Gijs Nagel, DeGiro
Gijs Nagel responded with the statement the options matched inhouse are just as safe as any other option contract at other brokers. The trades aren’t matched at a CCP. Opt out isn’t possible as it’s a part of the regular rules for trading. It has been part of the terms and conditions from the start. He confirms it isn’t possible to see where the option contract has been traded – as the venue of the trade doesn’t matter for clients, in his view. However, if you download the transaction overview with “pdf” – you can see the venue where the trade has been matched. GIMTECH is the code for internalized trades.
Full reaction by DeGiro
Here’s the full reaction by DeGiro on the post above. Wil give a short reaction in a new post, somewhere shortly after the weekend.
Haha, Jack is zeker een market maker. Complete onzin, counterpartrisk is gelijk als bij een andere broker en prijs gelijk of beter, jack je slaat de plank mis. In de trade bevestigingen laat DEGIRO zien wanneer een trade intern is afgewikkeld. Niks geheimzinnigs aan.
Net zo een boevenpartij als Plus500, Tegen je klanten in handelen en er vanuit gaan dat de meeste verlies maken.
Now that we have established once more the intimate relationship between DeGiro and HiQ – the latter are shown the retail flow from DeGiro’s clients so that they may “match” internally – it underscores how easy it would have been for HiQ to be the party to flash trade against i.e. front-run those ridiculous orders that DeGiro used to “prove” that TOM’s smart order router was deficient.
As for the financial health of the company that administers the HiQ fund: their equity was down to a mere 600k euros by the end of June and they were losing money at a rate of around 400k in the first six months as you can read on their website. Take a look at their half year report, it’s an interesting read. This pace will pick up seeing how their AuM got slammed by the end of the first half year. The regulatory requirement is for the fund to have 500k in equity (namely, a quarter of their annual running expenses). It doesn’t take a genius to figure out that without a capital injection, the company would have sunk below the minimum requirement by the end of July and then it would have been lights out for their fund. HiQ being HiQ, course they put a nice spin on a capital injection (to “hire experienced traders” and to “demonstrate their confidence in the fund”).
Still, with running expenses at around 2 million euros per year and AUM down to a mere 25 million, their expected income is limited to around 500k a year. (Management fees of 2% of the AuM.) Reducing a staff of around 20 is not so easy in the Netherlands, so good luck to them cutting their costs. It’s rather easy to see how this is going to end.
note to Gijs: Michael Lewis’ “Flash Boys” has interesting things to say about preying on customer flow (“internal matching”). You might want to read those chapters before you run your mouth about Binck again.
This is shocking. Gijs Nagel doesn’t seem to know what CCP is in the first place.
If you win big with options (say VW or Altana) – hiq will be on other side of the trade.
And they will collapse. This means DeGiro will collapse. And you end up with worthless option contracts.
At Euronext the money from derivatives is guaranteed because the Central Counterparty (CCP)
The internally matched trades off exchange are not cleared which in it self doesn’t affect the security of this trade towards clients. Though the fact that Degiro as a brokers enters the non-secure OTC space where trades are not guaranteed, makes them very vurnerable. Therefor ALL trades of clients with the Degiro will be imposed to a higher counterparty risk with a marginally capitalized broker.
If HiQ has a first look to a trade before it will be send to Euronext, how does Degiro safeguards that HiQ is not front running or otherwise taking advantage of this info? The information they receive in the sneak-preview of this trade can be regarded as price sensitive information (koersgevoelige Informatie).
“DeGiro houdt de posities in Derivaten voor haar klanten via Beleggersgiro aan bij derden. DeGiro
zal daarbij aan die derden zekerheid moeten stellen. DeGiro is gerechtigd om hiervoor geld en
Financiële Instrumenten te gebruiken die zij aanhoudt voor rekening en risico van Cliënt. DeGiro
zal er naar streven om daarbij een redelijke verhouding in acht te nemen tussen de voor Cliënt
aangehouden posities in geld en Financiële Instrumenten die zij tot zekerheid stelt aan derden en
de verplichtingen die voor haar jegens die derden voortvloeien uit de posities in Derivaten en de
posities in Debet Geld en Debet Effecten van Cliënt.”
Interesting read…
https://www.degiro.nl/data/pdf/NIB_OrderenOrderuitvoeringbeleid.pdf
As they probably both are clients of our beloved public bank and clear with them, I am curious about their stance. If Hiq will go bust they probably will be the bagholder in the end or face a major problem if they let de Degiro’s clients face the counterparty risk… Any insights?
Let me get this straight.
Say I make markets in options on Ten Cate. A retail client of DeGiro buys a put on my price I quote in the screen. The trade goes to HiQ and I don’t even know about it?
HiQ trades on the liquidity I am providing in the screen? And I don’t get information at all about this transactions?
An this is LEGAL?
Compliments on your story. I totally agree that this is illegal to do. I cannot think of a reason why the Giro is doing this unlike perhaps to help the performance of the HIQ fund which results are dramatic.
I hold a long term etf portfolio @degiro. Is my money at risk?
Als Jack een statement wil maken
Laat de giro met rust die doet goed werk
Klanten profiteren van de lage kosten prima
Klant staat voorop top.
Laat die Jack zich maar eens verdiepen in de markten
Die wereldwijd worden gemanipuleerd. Dat is een schande.
Dit komt door de derivatenhandel.
Bv opties. handel wordt rustig naar boven of naar beneden gezet.
Nogmaals kijk daar na en kom dan nog eens terug.
Of zoals er gesuggereerd wordt is de anonieme bron een marketmaker!! Dat verklaard alles !!
Eigen belang!!
Laat de giro met rust
Dit komt door derivatenhandel
Of zoals er gesuggereerd wordt
Welke serieuze belegger neemt nu ook een account bij Degiro?
Wil je het een beetje professioneel aanpakken dan kies je toch voor een internationaal gerespecteerde broker als IB/Lynx die zowel qua handelsmogelijkheden als uitvoering top is. Zeker in vergelijking met die bagger uit Amsterdam.
shocking news. This shows that regulators should shift their focus from high-frequency trading (pseudo) issues to such type of issues instead.
Mega zwamverhaal over de order routering bij DeGiro
https://www.degiro.nl/data/pdf/Orderbeleid_DEGIRO.pdf
https://www.degiro.nl/order-routering/
(tabje Opties)
Smart Order Routing dit, meest liquide platform dat. Ook ten tijde van hun fittie met Binck pochde HIQ ermee, dat zij TOM links zouden laten liggen en standaard hun orders zouden versturen naar Euronext, want dat was de beurs met de beste liquiditeit. Geheel in lijn met hun eigen beleid zoals uitgelegd op de bovenstaande links. De praktijk wijst nu uit dat ze de klantenorder eerst flashen aan hun eigen ‘hedge fund’ en idealiter helemaal geen order versturen naar enige beurs. Waar lees ik dat terug in hun beleid???
DeGiro werkt met OTC.
Volgens hun voorwaarden garanderen ze tot 20.000 €.
Hogere bedragen zijn voor eigen rekening, men zal ze zo correct mogelijk proberen af te werken.
De controlerende instanties weten hiervan:
De AFM staat deze constructie blijkbaar toe.
De DNB vindt het onderpand blijkbaar voldoende.
Ergo; met deze handelswijze hoef je niet ingeschreven te zijn (o.a. EMIR, CCP en MIFI) Den niet aan de strenge voorwaardent e voldoen.
Iedereen kan het concept dus kopieëren (hedgefonds of PPE als counterpart).
Laten we wel wezen, dit zal niet alleen van de laatste maand zijn. De vraag rijst hoe catastrofaal slecht het rendement van Hiq wel niet zou zijn geweest zonder dit soort trucs? Dat vind ik misschien nog wel het meest verontrustend.
I think this is a typical move for a company and probably a management that is acting or seeing itself as ‘disruptors’ of trading in the financial markets. New business models and such and such. Is this risk that they expose their clients, their own accounts and the stability of the financial market to proper? Probably not in the long run.
I think this is the 3rd generation of adaptation of the process in the financial markets of the flow of liquidity.
1st GENERATION:
Creation of MTF’s by clients of the traditional stock exchanges by parties already moving/owning the majority of the liquidity. And for me nowadays liquidity means messages and bytes going back and forth in the global financial system.
In example Chi-X 2007, (BNP Paribas, Citadel, Citigroup, Credit Suisse, Fortis, GETCO Europe Ltd, Goldman Sachs, Merrill Lynch, Morgan Stanley, Optiver, Société Générale and UBS.) These guys eassily moved 60% of total exchange volumes..
MIFID allowing more internalisation and so called best execution principles
– order routing latency reduction number 1 focus of all trading venues (traditional and MTF’s)
– nobody in the world who could control best execution principles
– regulators the least equipped due to technological knowledge GAP
– abolition of the 3 minute stock freeze (tresholds/collars) by traditional stock exchanges
– traditional stock exchanges in tears about ‘level playing field’
– Algo and HFT trading in 5th gear
– dark pools, light pools and new defenition of ‘venues’
Luckily, the application of MIFID was limited to the asset classes shares and bonds.
It was later that derivatives came into the spotlight.
2nd GENERATION:
MIFID 2 in the making and expanding scope to primary next to secondary markets
and more asset classes
Consolidation and break up/spin-offs of the traditional stock exchanges on a global scale (Euronext, NYSE, NASDAQ, OMX, ICE, etc..)
Redefinition the SBU’s of traditional stock exchanges and further segregation of equity vs derivative trading operations
MTF’s are all over the place and also begin to consolidate and want to expand their business in other asset classes
Specialization of firms disseminating liquidity statistics
Front end STP retail order flow becomes commodity
Low cost retail/b2b brokerage is a market standard
3rd GENERATION
Euronext vs. Binck/TOM, who owns the ‘brand’ AEX (apparently Euronext) but,
did not stop the ability of MTF’s to start creating financial instruments for themselves…
Reclassification of MTF’s, they get +1 in status as they can trade and execute most asset classes and now have access to primary markets as issuers of financial instruments.
Where is the regulation or more importantly the control of these expanded operations by non regulated, non traditional, trading venues? Probably regulators will catch up in the next round…
Low cost brokers become the incumbent and new players enter applying new business and risk models.. waiting to be validated or not by MIFID 2, 3, 4.. etc..
Final remarks:
Who guarantees my trade in today’s day and age, why did we make this so complex?
Weren’t we all happy with the limited markets and concentrated liquidity and spreads back in the days?
How many options series in a specific contract do we need?
Did we really need all this to better protect the interest of the consumer?
Who the hell is paying for all these IT costs?
Regards,
MSR
ps. I also hold long term ETF positions at De Giro, but for now not worried enough to sell. Would be interesting to know if this HiQ can take the whole of De Giro down..
The argument that ‘shares’ (including etfs) are held in your name over at some depository and that your holdings are therefore not exposed to a counterparty risk vis-a-vis DEGIRO is a bit simplistic if you ask me.
Imagine one of their clients blows up and is unable to replenish his losses – not entirely out of the question if we’re talking derivatives positions that are not cleared centrally. According to DEGIRO’s client agreement (section 4.6, “Tekort”), DEGIRO is allowed to seek recourse in covering such a loss on a pro rata basis against their other customers (insofar as DEGIRO would themselves be unable to absorb the client’s loss) who hold positions in the same currency (i.e. pretty much all of their clients thanks to the euro). In other words, your long term etf portfolio could end up being used to cover another client’s losses due to counterparty risk on a derivatives position. That sounds lovely, doesn’t it?
I’d be curious to know if such a clause if standard with other brokers, e.g. Binck, IB etc.
Slightly off-topic: what’s the current AUM of the HIQ Market Neutral Fund? Last I read in their newsletter was around 25 million at the end of July. There was another 4% loss in August and I would imagine more investors have decided to withdraw their money since then. That leaves how much?
http://www.iex.nl/Column/164446/Ophef-over-DeGiro.aspx
According to DeGiro’s documents, in-house matching (only) takes place when they can (and will) match orders from two of DeGiro’s clients. (See page 8 of
https://www.degiro.nl/data/pdf/NIB_OrderenOrderuitvoeringbeleid.pdf)
In order for DeGiro to classify the type of trading that Jack has observed as “in-house matching” against the HIQ Market Neutral Fund, it is implied that the HIQ Market Neutral Fund acted as a client of DeGiro’s. This contradicts HIQ’s own documents that detail the prime brokers that they use (ABN, Morgan Stanley, Barclays). Why would the HIQ fund trade via DeGiro? ABN is cheaper!
Moreover, as the example of the Ten Cate options demonstrated, the HIQ Market Neutral Fund did not have a resting order for 50 contracts on any exchange, let alone entered via DeGiro.
Or is this Gijs’ way of saying that one client of DeGiro – the HIQ Market Neutral Fund – is being offered hidden order types that are otherwise unavailable to other clients of DeGiro? So many question ….
DEGIRO’s official reply on this blog:
https://www.degiro.nl/data/pdf/ReplyToBlog.pdf
having the main points:
We are and have been always entirely transparent regarding this matter (conditions, messages in the web trader, venue in the PDF trade confirmation) .
The safety of the positions you hold at a broker has nothing to do with the venue where you trade them. As the settlement is direct, trading internally enhances the safety with regard to trading.
It is perfectly legal, now and also under MiFiD 2017.
The information that is in order of a client is never shared with another client.
DEGIRO
If hedge fund HiQ collapses and goes bankrupt (not impossible at all for a hedge fund), what happens?
They hold the other side of option contracts with DeGiro. Think about it….
It’s laughable that deGiro claims that their internal matching enhances the safety for clients.
It’s an ethical breach that’s much worse than TOM’s imperfect smart order router that they made such a fuss about. Bunch of hypocrites.
HiQ is likely also counterparty in the securities lending. Double the risk.
@ 11:14
It worries me greatly that the various funds administered by HIQ are trading via the DEGIRO platform.
Let’s be honest, with only a handful of exceptions, DEGIRO doesn’t have their own exchange memberships that would allow them to enjoy the cheapest transaction costs. Besides, they have no clearing structure of their own. In short: they piggyback off ABN as both their clearer and DMA-provider. Consequently, DEGIRO’s fees are simply ABN’s fees PLUS a mark up.
Consequently, HIQ can trade more cheaply using the ABN’s DMA rather than via DEGIRO. If need be, HIQ can even get their own membership (as they have on Euronext).
Conclusion: I can see only two reasons for HIQ to trade via DEGIRO rather than via ABN’s DMA or their own membership:
(a) To front-run DEGIRO’s client order flow (as in the case of the Ten Cate options)
or
(b) To generate fees for DEGIRO (which comes at the expense of the HIQ Market Neutral Fund’s participants).
Either way, a client of DEGIRO / HIQ is getting the short end of the stick. This is wrong on so many levels!
The HIQ Market Neutral Fund has suffered losses of some 20 million euros in 2015 (not counting fund outflows). Were these actual trading losses or did DEGIRO make 20 million in fees thanks to a bit of churning?
As for DEGIRO’s claims that they don’t show client order flow to other clients of theirs: then how in the hell was the HIQ fund able to trade against the Ten Cate order that never reached an exchange and exceeded the on screen liquidity? What secret order type did the HIQ guys use on DEGIRO’s platform that allowed them to have a HIDDEN (RESTING) ORDER to in-house match against Jack’s friend? I can’t find this f*cking order type in my WebTrader!!!
Devastating for the market
Maybe the blogger means that he, as a market maker, wants to profit from the spread that
our clients want to pay instead of letting DeGiro give this advantage to its own clients? It
is really the case that due to our efficiencies we remove part of the easy money for the
HFT and market making community. Instead of keeping this to our selves, we give it back
in low fees. Our clients seem to love it.
“we remove part of the easy money for the HFT and market making community”
Well Gijs, it’s only easy if you get non-public information about order flow AND you can then jump to the front of the queue under the guise of “in-house matching”.
Lemme put this in another way:
If making money is so easy in today’s markets, how come your piss-poor traders at the HiQ Fund are down 30% for the year?
Check for the TMG options to see what a market looks like without market makers.
Also, who checks time/price priority with inhouse matching?
How convenient that DeGiro doesn’t automatically exercise deep in-the-money options at expiry, as Trader Jack had observed earlier. Well, it does serve the interest of their other client (HiQ) who had acted as the counterparty.
Has anyone around here by any chance taken the tour of Hiq’s premises? I would appreciate a witness account of the thickness of the Chinese walls between Hiq and Degiro.
Has anyone got the manual of the priority of trades in the queue in the inhouse matching business at DeGiro?
HiQ is obviously automatic bid and offer everywhere in stealth mode. But if a client puts in an offerin the screen of Euronext, and another client wants to buy it.
Who does the trade? The resting order in the book, or HiQ?
The stealth orders are called “join orders” over at DeGiro.
According to their Orders & Order Execution policy, this order type is “currently not available” to their clients. See link above.
Except to HiQ it seems.
HiQ go on to brag about … I mean explain … how one ‘earns’ the bid-ask spread with this order type. “Our clients seem to love it.” Yes I am sure HiQ love it seeing how they are the only ones who may use it! Yet they still can’t make money, bunch of morons.
As for OTC trades, it is worth noting that DeGiro explicitly warns about the embedded counterparty risk (page 10). I would bet most clients don’t realize they are often effectively trading OTC against HiQ when they are being in-house matched. Yet when Trader Jack brings up the issue of counterparty risk, DeGiro calls him out for being clueless. Hmm…
So what’s next? Will the afm stop de giro’s rather client unfriendly business case? Will the giro as a broker and the market maker start or continue to lose money? I guess in 6 months we will see them goining down.
In the English version of their “Orders and Order Execution Policy” (go to degiro.co.uk), DEGIRO explains the cost benefits of in-house matching as follows:
“Because no exchange, clearing and settlement costs are made, such transactions [in-house matched orders] generate a cost benefit.”
Needless to say, DEGIRO is talking about all asset classes including shares.
Think about the legal ramifications for a second, if you were to be in-house matched on a purchase of shares of company XYZ with counterparty the HIQ Market Neutral Fund: your trade is not going to be cleared or settled (in the traditional sense) according to DEGIRO.
In the joint (aggregate) “effectengiro” that DEGIRO administers for all of its clients, no position change in the shares of company XYZ is going (needs) to be recorded: your purchase is cancelled against HIQ’s sell, hence DEGIRO disposes of the rather delicate process of clearing and settlement and save a couple of cents. HIQ does not even have to borrow the shares they sold to you, since the trade is not going to be settled in the traditional sense anyhow. In theory, HIQ could sell you more shares than there are outstanding. Ask yourself, what legal title does one have against a trade that was never cleared or settled in a worst case scenario (bankruptcy of the broker or the counterparty in the OTC trade)? A number of dividend entitlement / taxation issues also come to mind.
The lack of settlement also raises the question on what legal basis has DEGIRO charged its (buying) customers for in-house matched orders? As anyone who has ever encountered a delayed settlement knows, payment is only due upon settlement of the trade. And without settlement, you could have continued to earn interest on your hard earned cash.
Next question: what happens if you decide to transfer your stock position to another broker? Will HIQ scramble to borrow the shares and will this cause any delay? Or may DEGIRO simply deny your request for a transfer on the very basis that only cleared and settled trades may be transferred and therefore yours may not?
As for Gijs’ baffling response that it is irrelevant on which exchange a security is traded, I would like to remind him that this important issue was the cornerstone of Euronext’s legal battle with TOM. In a strict legal sense, a TOM option is not identical to a Euronext option with the same contract specifications. Only because the people behind TOM (must!) ensure that if a client wishes to close his TOM position on Euronext, he may do so, is this important distinction of lesser importance from a practical point of view for the end investor. (TOM can simply insert themselves in a trade against their client on TOM that is similar to the one on Euronext, and keep the offsetting TOM and Euronext option positions in their own books until expiry.)
Ask yourself the question what happens if Trader Jack’s friend decides to transfer his TCT calls to another broker? This forces the NON-CLEARED position to be booked out of DEGIRO’s joint effectengiro into (let’s say) Clearnet’s CLEARED positions where they don’t fit in the Open Interest BTW. It would be interesting to see what happens if Trader Jack’s friend decides to do just that Monday morning.
There are simply so many questions that worried customers would like to get a clear response to from DEGIRO. Let’s make a list and see if Gijs can find the time to answer some of them. You know he reads this blog!
Do you guys think a buy and hold portfolio @degiro holds a higher risk than with any other broker and/or bank?
anyone?
KLACHT Ik heb Binck toestemming gegeven om mijn DeGiro portefeuille over te boeken van DeGiro naar Binck. Nu, meer dan 11 weken later, is slechte een gedeelte overgeboekt en krijg ik van Binck te horen dat DeGiro niet reageert op hun verzoeken. Ik denk dat DeGiro een wat fermere aansporing nodig heeft.
PRODUCT DETAILS Ovgerboeken beleggingsportefeuille van DeGiro naar een andere bank
GEWENSTE OPLOSSING Wellicht kunt U de druk op DeGiro opvoeren en consumenten waarchuwen dat DeGiro alles doet om je als klant te krijgen, maar alles nalaat om netjes afscheid van je te nemen als je dat wenst.
http://www.klachtenkompas.nl/degironl/overboeken-portefeuille-duurt-meer-dan-11-weken-en-nog-niet-opgelost
Dat problemen te verwachten waren met het overboeken van posities bij DeGiro naar een andere broker, is hierboven al haarfijn uitgelegd op 19 sept 8:08 PM.
Aandelen die alleen in een interne “in-house matching” administratie bestaan laten maar nooit feitelijk zijn geleverd laten zich nu eenmaal verdomd lastig overboeken naar een derde. Helaas hebben de meeste particuliere beleggers weinig tot geen kaas gelezen van kwesties als clearing, settlement en custody of doen die af als “niet interessant”, met als gevolg dat ze nul begrip hebben waar ze aan zijn begonnen met het openen van een rekening bij die nieuwe broker en vertwijfeld bevestiging zoeken dat ze safe zitten. Daarvan kun je de nodige schrijnende voorbeelden lezen hierboven en op het IEX forum. Anyone?
duurt weer een eeuwigheid voordat de resultaten van het hiq fonds per medio september online worden gezet. dat wil nog wel eens een voorbode zijn voor een dikke vette min. ook de verplichte maandelijkse rapportage omtrent het fondsvermogen is sinds april niet meer geüpdate. wellicht een klusje voor een van de nieuwe juniors.
Ik zie een laatste koers van hiq van 12,55 per 14/9. Daling dus alweer…..
@YOU CAN CHECK-OUT ANYTIME YOU LIKE, BUT YOU CAN NEVER LEAVE
Klopt, ik heb geen verstand van clearing, settlement en custody. Niet mijn ding. Als kleine zelfstandige zoek ik een veilige en betrouwbare broker voor een buy and hold pensioenportefeuille (nix geen opties, derivaten oid). Het feit dat de effecten apart bewaard worden in een bewaarbedrijf biedt niet voldoende bescherming volgens jou?
@DICKIE: voor een veilige betrouwbare broker ga je natuurlijk naar de grootbanken, Alex of Binck. Voor een dubbeltje op de eerste rang zitten kan ook in 2015 nog steeds niet.
Als je het custody account hebt dan worden je stukken niet beleend, dan is het bewaarbedrijf ok-ish. Let wel: het bewaarbedrijf van degiro valt ook onder hun holding.
Je cash geld is gedekt tot 20K (en niet 100K) want degiro heeft geen bankvergunning en valt daardoor niet onder het depositogarantiestelsel. Je krijgt ook geen bankrekening.
Nu maar hopen dat je Hotel California uit komt….
Dickie, ik vraag me af of je het wel WILT begrijpen. Het staat toch glashelder uitgelegd als je het mij vraagt. Dan kun je jezelf wel drie keer wijsmaken dat het anders zit, maar daar schiet je niets mee op.
Als de door jou gekochte aandelen netjes via de beurs (en haar clearing/settlement-organisatie) zijn verwerkt, dan worden er daadwerkelijk stukken overgeschreven van het bewaarbedrijf van de verkoper naar dat van jouw broker. Een mooi systeem van scheiding dat erop moet toezien dat als een broker (bank) of de verkoper onverhoopt om zou vallen, jouw effectenportefeuille daar niet door wordt geraakt.
DEGIRO doet het iets anders, want als het even kan vermijden zij clearing en settlement (om kosten te besparen, schrijven ze zelf) en administreren ze een en ander intern. Die “kleine lettertjes” staan boven uitgespeld. DEGIRO voert de administratie bij het bewaarbedrijf voor alle klanten tezamen (een “effectengiro”). Dus als de ene klant van DEGIRO aan de andere verkoopt, dan verandert er helemaal niets bij het bewaarbedrijf.
Vergelijk het met de volgende situatie. Jij spreekt af met jouw buurman dat hij jou 100 aandelen Philips verkoopt. Hij heeft ze helemaal niet, maar het is een goeie gozer en jij vertrouwt hem dat hij op enig moment in de toekomst alsnog je stukjes kan leveren, dus in de tussentijd vind jij het niet erg dat die aandelen niet normaal geleverd worden (gecleared en gesettled). Jij betaalt hem en hij houdt braaf in een schriftje bij dat jij 100 long bent en hij 100 short zit. Daarnaast houdt hij de gezamenlijke positie – nul aandelen! – van al zijn klanten (jij en hemzelf) bij een extern bewaarbedrijf aan. Dat is voor jouw nachtrust.
Volgende week treft hem het noodlot. Baan kwijt, vrouw wil scheiden en de hypotheek stond ook al onder water. Nu begin je toch een beetje ongerust te worden. Dat bewaarbedrijf heeft immers nul aandelen. Dus als de buurman financieel kopje onder gaat, dan moet jij zelf alsnog proberen om je buurman eindelijk zover te krijgen dat hij die 100 aandelen aan jou resp. het bewaarbedrijf gaat leveren. Dat is het tegenpartij-risico waar Trader Jack over heeft geschreven. Zolang jouw buurman die 100 aandelen niet heeft geleverd, hou jij nl een vordering op je buurman voor de levering van 100 aandelen. Het bewaarbedrijf heeft die 100 aandelen immers nooit gekregen, hoe moeten zij jou in hemelsnaam 100 aandelen geven?
Dezelfde problematiek heb je als jij “van je buurman” over wilt stappen naar Binck. Zolang je buurman die 100 aandelen Philips niet aan jullie bewaarbedrijf kan of wil leveren, kan het bewaarbedrijf jouw 100 aandelen niet overboeken naar Binck. Het bewaarbedrijf had immers 0 aandelen in de boeken, dankzij jullie intern gematchde transactie.
Lees ook de post van 18 september om 10:18 uur voor wat er gebeurt als er een probleem ontstaat met de gezamenlijke positie die bij het bewaarbedrijf wordt aangehouden, wie daarvoor opdraait. De bekende “kleine lettertjes” waarvoor alle klanten hebben getekend.
@FRM. Dank voor je reply. Heb een custody account en vrijwel geen cash op mn account. Als de holding failliet gaat kan het bewaarbedrijf meegesleurd worden en klanten zo hun posities/doekoe verliezen? Is het niet zo dat het bewaarbedrijf een eigen entiteit is en buiten schot blijft?
@anonymous. Dank voor je reply. Ik was/ben zo naief te denken dat de VEB of AFM beleggers hiertegen zou beschermen.
@Dickie 9:30: het systeem van Degiro functioneert op zich prima zolang er geen klanten tussen zitten die short gaan. Zet je doelbewust en structureel je eigen hedge fund ertussen als tegenpartij (zonder daar ruchtbaarheid aan te geven), dan is dat wat mij betreft de kat op het spek binden.
Van de toezichthouders hoef je niets te verwachten. Hun kaken waren stijf op elkaar toen de ene na de andere woekerpolis aan de man werd gebracht. DNB is vandaag de dag zelfs wettelijk uitgesloten van aansprakelijkheid voor haar fouten / falen. En wanneer een nieuw schandaal zich voordoet, dan was het “niet de taak” van de toezichthouder om de consument erop te attenderen dat een product volstrekt anders werkt dan een fatsoenlijke c.q. naieve burger zou verwachten. Bovendien, “het staat gewoon in de voorwaarden”, dat is ook het eerste verweer van Degiro.
Van de VEB mag je inderdaad beter verwachten. Zij horen zich niet blind te staren op lagere transactiekosten en om na 2 jaar alsnog met een “waarschuwing” o.i.d. te komen, dat straalt niet goed af op de eigen organisatie. Als er al een reactie komt van hun zijde, zullen zij wel gaan zeggen dat ze niet wisten dat het eigen hedge fund een centrale rol speelt binnen Degiro (“anders …”) en dat is inderdaad iets waar Degiro weinig transparant in is geweest. In dat opzicht hulde voor Trader Jack die feilloos de vinger op de zere plek wist te leggen.
Some above quality comments here deserve to be written in English.
Jack FYI as a retail investor/trader it is possible to buy and sell in the form of an iceberg orders at IG, but only as special request through cusomer service.
DeGiro is still liquid, just recieved my cash back on my bank account. Took a bit longer processing than the anticipated two days. Only have a small b&h position left.
http://www.hiqinvest.nl/
Market neutral fund is desperatly seeking alpha
Yup they lost another 5% in the first two weeks of september. And since they tend to be long equity overall, the second half of september could be even better.
But I’m sure they’ll start making gazillions of euro’s soon. They already employ the world’s best traders (or so they say) and they have recently added ten more. Buy of a lifetime!
(Disclosure: the author wishes he is short the MNF)
You may hope that HiQ this time is short in VW instead of their long position during the event that Porsche was trying to make hostile takeover of VW.
Stichting Degiro safekeeps the net positions of the entities she services in separate accounts with her clearers-Prime brokers), they have 3: ABN AMRO, Morgan Stanley and Barclays. There will be at least 3 accounts with each , 1 for the normal degiro Retail clients , from which securites can be borrowed and loaned (A), which is shared with other clients of the clearer. 1 for the custody retail clients of DeGiro, which is a seggregated account (C) and 1 for the activities of HIQ (H)
In this case, based on the trade of jacks’ friend, you would expect a long position booked in account A and a short position in account H.
Cleared trades are sent to the clearer by the CCP and processed into a position, OTC trades are delivered by the client to the clearer to be processed into a position
According to Jack, this is not the case:
“Positions of DeGiro are held at ABN AMRO. But at ABN AMRO there’s no such long/short position in this Ten Cate option in DeGiro’s account.”
Interesting how jack got this insight… assuming jack is right and there was/is no long position in the account of Degiro (either in A or C) nor short position on HIQ (H).
There is 1 other logical explanation for this : The net position change in the Degiro retail account must have been zero. The counterparty to Jacks’ friend OTC derivatives trade would be another Degiro Retail client.
Taking into account the speed of the execution, the mail from Degiro and the lack of open interest that day that other client would be “marketmaking” HIQ according to Jack or HIQ TLP (HIQ Transaction and Liquidity providing)
Which would mean HIQ has positions with 4/5 entities and is acting like an internal Prime Broker to Jacks’ friend/Degiro Retail clients for OTC derivatives .
It would have to hedge it’s exposure on one of the HIQ accounts (H or HIQ TLP) or hold margin at these clearers/entities. In the semi-annual report of 2014 you do see, HIQ holds cash at these 5 entities
http://www.hiqinvest.nl/download.php?downloadid=375
Liquide middelen 14-11-2014
Banktegoeden Clearing 6.427.989
Banktegoeden Morgan Stanley 17.717.833
Banktegoed ABN HiQ TLP 1.023.135
Stortingsrekening ABN 1.201.654
Barclays 4.774.414
Rekening courant tegoed bij DeGiro 2.010.000
Margin accounts CFD’s -44.129
Totaal 33.155.025
Unfortunately the full annual report for 201/2015 has not been posted yet
Is jack’s friend gonna be happy with this ?
Probably not, he would rather have seen his position (and the counterparty risk of HIQ/HIQ TLP monitored by one of the external clearers, instead of being dependent on the inhouse position and risk systems within LPE capital/HIQ/Degiro which has to monitor the HIQ positions at all 5 entities. He will have to trust his counterparty risk is managed correctly.
What does he get in return for his trust: Low fees
The good thing about HIQ is that they are pretty transparant, even about their losses.
It would suit Degiro however if they informed the clients of HIQ as well as the clients of Degiro what the amount of counterparty risk of all other Degiro retail clients to HIQ/HIQ TLP is and how this is managed.
With regard to the other questions, is my position safe:
There is the difference between securities and derivatives.
The trade Jack stumbled upon was a derivatives trade, with some other client/HIQ entity possibly.
Jack has not (yet) found securities trades against another client/HIQ entity
So if these are traded on the exchange and cleared than the securities are kept at het safekeeping accounts at the custodians (A or C) , which in their turn keep the position at the CSD (Central Securites Depository)
Derived products (such as options are not kept at a CSD, only at the clearer/prime Broker
Also the account type matters, when the positions are in the Degiro normal Retail account (A) , clients can go short in securities and their long positions can be loaned out to other clients of the clearer/custodian.
If the securties positions are in the Degiro custody seggegated account (C), clients cannot go short and no borrow and lending activites should occur.
There is one possible advantage for Retail clients with accounttype A: If a cashdividend is paid on a position which is not loaned out, you wil receive the dividend with the dividend tax being withheld (net).
If your positon is loaned out you receive a compensation from the borrower which is gross, so no dividend tax is being withheld
To what extent these advantages are passed on to the clients of accounttype A is another matter
Small addendum:
Derived products (such as options are not kept at a CSD, only at the clearing organisation, clearer(s)/prime Broker
So if it was traded via Euronext, Jacks’ friends’ position would be part of the position maintained on total level at Clearnet SA for clearing member ABN AMRO, part of the total position maintained for Degiro Retail clients (A) within ABN AMRO and on client level be maintained as a position within Degiro.
In case of an inhouse trade it would only be part of the latter.
I can imagine Jack is dying to see who has the counter position within the Degiro administration”.
Hello G(ijs)
How nice of you to respond. Bit long-winded though, if not to say misleading.
“There is 1 other logical explanation for this : The net position change in the Degiro retail account must have been zero. The counterparty to Jacks’ friend OTC derivatives trade would be another Degiro Retail client.”
This possibility is ruled out on the basis that a hypothetical retail counterparty would then have needed to have a resting (HIDDEN) sell order for 50 contracts in Degiro’s platform at the time that Jack’s friend placed his order, because the execution was instantaneous. Let’s be honest, the probability that some retail client of Degiro’s – without knowledge of Jack’s friend’s incoming order – would have placed a normal limit order with exactly the same price/qty a millisecond before or after Jack’s friend’s order was placed in such an illiquid option series, that would have allowed Degiro to match two retail orders, is zero. But no such hidden orders are available to retail clients of Degiro so we can safely rule out this hypothetical possibility.
Jack’s conclusion that HiQ acted – in stealth mode – against his friend’s order therefore remains spot on.
Besides, as Jack had already pointed out in the introduction (screenshot), the help desk of Degiro had bluntly admitted that the Ten Cate options trade was against “a party related to Degiro” (“een aan Degiro gelieerde partij”). That leaves room for only HiQ.
In the “official” Reply to Blog on Degiro’s website, Degiro openly admits that funds administered by HiQ regularly trade against clients of Degiro’s. Outside of the HiQ Market Neutral Fund (which essentially includes the activity of HIQ TLP), the other HiQ Funds are not allowed to trade derivative products, so again Degiro has implicitly acknowledged that the HiQ Market Neutral Fund does a fair bit of trading against Degiro clients, but of course Degiro preferred to phrase it in a rather intransparent manner.
In any event, I don’t believe Jack or anyone else for that matter is “dying to see” which customer of Degiro’s acted as a counterparty. No sane person wants to bear the counterparty risk that is being introduced due to Degiro’s OTC trades, end of story!
As for having trust in the ability of HiQ c.s. to manage counterparty risk, you’ve got to be kidding?!? Their fund has lost nearly 50% in less than a year due to some shitty positions that they have kept on their books for what seems like an eternity (the September 2015 newsletter blames the legacy positions for the big loss in August). Why would their management in other areas be any better?
hear, hear!! 2:24
eh….. I’m not Gijs, the letter G is quite commonly used
Just like all people posting I am trying to figure out how Degiro is managing it’s derivatives positions, if and when they are traded inhouse.
I am intrigued and impressed with Jack’s drive to expose any unknown risks with any broker , even when they are advertising
I don’t think my reaction would benefit Degiro
It’s good to have more competition, but there should be no additional untransparant risks
I am trying to look at two sides of het coin, to put it a lot shorter:
On one hand It’s a risk/reward thing: No exchange or clearing fees against more counterparty risk
On the other hand I would rather have my counterparty risk managed by a clearing organisation or a clearer than have any counterparty risk with a hedgefund,
perhaps some future competition between marketmakers to get the highest bid/lowest offer on the screen?!
Fair point
“Ik adviseer iedereen die klant is bij DeGiro goed te controleren of het dividend wel wordt uitgekeerd. Zelf heb ik diverse malen geconstateerd dat dit structureel niet tijdig of pas na melding door mijzelf werd geboekt. Daarnaast werd er regelmatig ten onrechte dividendbelasting ingehouden op iShares. Dit alles en de chaotische administratie naast de vaak onjuiste informatie deed mij besluiten snel te stoppen met deze financiële dienstverlener. Ruim 5 maanden duurde het voordat de portefeuille was overgeboekt naar een andere, betrouwbaardere partij. Ik zet grote vraagtekens bij de betrouwbaarheid en integriteit van DeGiro! Dit alles is te bewijzen met een intussen opgebouwd lijvig dossier.”
http://www.iex.nl/Column/164446/Ophef-over-DeGiro/reacties.aspx?page=3
Does the HIQ fund still have a reason to exist? Cant imagine selling a market neutral fund with this track record. Cant imagine running a 10+ people organisation on 25m AUM. Cut your losses is the first rule a trader is taught.
the 10 rookies are to rip off retail clients on a larger scale with their OTC inhouse matched trades.
HIQ, with their the 10 rookies: who is their microwave-contractor?
oh, wait …
otherwise: colocation in Basildon perhaps?
“Cant imagine running a 10+ people organisation on 25m AUM.”
What’s worse, they were already at a headcount of 20 before hiring the juniors. And AUM is down to 18m as clients continue to withdraw money whilst the fund managers drop 5-10% per month. Ouch.
“Cut your losses is the first rule a trader is taught.”
Amen. It is worth remembering that their fund lost almost a third in a single day in 2008 due to an overleveraged Volkswagen position. They didn’t close the position because they decided to cut their losses, no their clearer forced them out with a margin call before the opening. Mind you this was mid-september 2008 when the stock opened 10 percent higher at around 250 euros and it nearly killed them. A month later the stock was trading above 1.000. Needless to say, they whined about the margin call that had saved their asses. Clueless.
Jasper Anderluh van HiQ Invest, sinds 2007 actief, voelde woensdag duidelijk niet voor het verlagen van de beheervergoeding: ‘Je koopt een strategie. Ik heb de beste mensen in dienst, die ook ergens anders aan de slag kunnen tegen een hoog salaris. Dat moet betaald worden.’
http://fd.nl/beurs/1094971/nederlandse-hedgefondsmanagers-stellen-eigen-beloning-ter-discussie
Where can I find there AUM?
http://www.hiqinvest.com/HiQ_2015_09.pdf
AUM 23 mln and sinking….
It’s in their “Maandbericht Art.50 Bgfo” which you can download from their website –> Document Centre. Eur 18.7 million as of 31-08-2015. It was Eur 88.9 million one year earlier. At about 2.5% manager fees that means less than half a million to pay for a staff of around 30 not to mention their office. Difficult to see how this can end well.
The whole LPE group is one joke to me (degiro/deziro/hiq/fundshare)
@ 4:46 P.M. Sounds like someone is a tad disappointed he wasn’t hired to be one of HiQ’s 10 new traders?
@4
tumbleweed
Are shares also traded using Degiro’s dark pool?
In Sweden, brokers offer two kinds of brokerage accounts: so-called ‘investment savings accounts’ (ISK) and normal accounts. The difference is that the tax is calculated differently, and there are restrictions on what you put in the account and on where those instruments are traded. Normally, brokers do not allow you to deposit instruments which may have a negative value in an ISK account because the taxation becomes ‘strange’ and sometimes unfavourable for the investor. Degiro offers ISK accounts. It’s unclear if you can put options in Degiro’s ISK accounts.
If you buy instruments (such as shares or options) using funds deposited in an ISK, then you may normally only buy those instruments on a regulated market or an MTF, and you may normally only sell the instruments on regulated markets and MTFs. Thus, ISK trading using Degiro’s dark pool is illegal. Does Degiro use its dark pool for ISK account holders?
With the exception of cash and investment funds, an ISK may only contain instruments which are traded on a regulated marked or an MTF. Therefore, it is illegal to put Degiro’s OTC options in an ISK. Does Degiro allow its customers to put OTC options in ISK accounts?
Given that Degiro had not done any market research on for example the Hungarian market when they started offering brokerage services (apparently there are only three retail stock investors in the entire country), you can be sure that Degiro had given the peculiarities of the Swedish market A LOT of thought.
In all seriousness, Degiro’s market share on OMX stands at around 0.04% (this is not a joke) so it will take some time before any regulators would start to take notice of them.
Soms bijt de AFM zowaar. Al duren dit soort kwesties jaren, niet in de laatste plaats vanwege de diverse beroepsmogelijkheden en er wordt niet altijd gepubliceerd omtrent de overtreding c.q. boete. Ten overvloede, de boete was in het onderhavige geval sterk gematigd teneinde het bedrijf niet het laatste zetje richting de afgrond te geven.
https://www.afm.nl/nl-nl/nieuws/2015/nov/boete-melden-transacties
Reply to Anonymous at 11:03 PM: I have seen a statement (https://www.avanza.se/placera/telegram/2015/10/19/natmaklare-trogt-for-avanzanordnet-utmanaren-degiro-di.html) about Degiro’s market share at the Swedish market during a specific week in October.
Daily newspaper Dagens Industri stated that Degiro made 326 trades in total during that week, which is supposed to correspond to a market share of 0.01%. These numbers originally seem to come from Nasdaq OMX Group.
Gijs Nagel states that Degiro made about 1000 trades during that week according to Degiro’s own statistics, which corresponds to a market share of 0.04%.
I don’t care if the total market share is 0.01% or 0.04%; both of them are very low. According to the same statement, the two major online brokers Avanza and Nordnet had a market share of 8.9% and 5.4%, respectively, during that week in October.
What happens if you try to move your entire portfolio from Degiro to another broker, if the portfolio contains OTC options? Can other brokers store Degiro’s OTC options in the first place, or are you stuck with storing your OTC options and collateral with Degiro until the settlement date? This would make it more complex to switch brokers.
I can’t answer your question since I have never tried to do that. I will remark that there have been a fair number of complaints on various websites that it took Degiro literally months to transfer a portfolio to another broker (this was not specific to the Scandanavian markets btw). Having stuff in your portfolio that only exists ‘internally’ within Degiro, be it options or stocks traded against HIQ, certainly wouldn’t make things easier in that respect.
Hi, HIQ fans
The annual accounts for the HIQ Market Neutral fund have been posted on the 13th of november:
http://www.hiqinvest.nl/servicedesk/documentcenter/
annual report from may 2014 till may 2015:
The highligths:
AUM: from 84 mio to 40 mio
Loss: 22 mio (2013/2014 6 mio profit)
Net outflow: 22 mio (2013/2014 18 mio inflow)
Costs: 2,5 mio
Creditline from ABN clearing: from 98 mio to 24 mio
Creditline from Degiro: from 0 to 8 mio
Mind you, these number reflect the fund itself, not the sister company of Degiro that administers the fund (HIQ Invest B.V.). Fund outflows accelerated over the summer as the HIQ fund was producing god-awful results. As such, these numbers are rather outdated compared to the current size of the fund (AUM was down to 18 million euros by the end of October for example).
However, you do raise an interesting point with respect to the (new) credit facilities provided by Degiro. Degiro’s own equity stood at eur 278k at the end of 2013 (before a negative correction in 2014). According to the recent article in the FD newspaper, Degiro hasn’t turned a profit yet (any potential profit was spent on advertising).
Exactly how a company with equity less than 300k can provide a credit line of up to 8 million is a question that begs for an answer.
The second question would be: does the risk management of Degiro consider this wise? Especially given that ABN appears to offer a smaller leverage in proportion to the collateral kept at each. (oops, they’re also the risk management of HIQ, so we may not get an unbiased answer)
Third question: what leverage (if any) does Degiro offer to its other clients?
Fourth question: is any of the money kept in various “Cash Funds” of Degiro’s (other) clients being used to fund the trading positions of the HIQ Market Neutral Fund? (These “Cash Funds” serve as a proxy for ‘normal’ cash accounts that Degiro may not offer for lack of a banking license.)
If so, how does the management of Degiro rhyme this with supposed better investor protection of the cash of its (other) clients through its use of “Cash Funds” as opposed to the 100k depositor protection that one enjoys with brokers with a banking license?
About the 100k rule, am I understanding correctly that money deposited in a Degiro account counts as an investment in a financial instrument and not as a deposit in a bank account? And if Degiro collapses, then whatever holdings Degiro contains will be distributed to Degiro’s customers, and then the Dutch government covers losses of up to 20,000 euros if some assets are ‘gone’? If the 20k rule is used, when would the Dutch government calculate the net asset value (NAV) of the cash fund? On the day Degiro collapses, or several months later when the NAV may have dropped to zero as the money is gone?
I find Degiro’s share borrowing strange. Is this something which is common in the Netherlands? Up here in Scandinavia, banks do not allow others to borrow securities belonging to customers. The law says that investors’ funds are guaranteed if the banks do not mess with them, and I’d imagine that this wouldn’t apply if banks are allowed to let people borrow the funds. For this reason, I find Degiro insecure. I realise that Scandinavian investment funds let people borrow a lot of securities from the funds, but I assume that fund managers have more influence on who is allowed to borrow shares than a typical Degiro customer has.
It’s not even clear to me whether the 20k applies to each client individually or only once (20k across all clients together) seeing how Degiro administers all of its clients holdings in a SINGLE account, an “effectengiro”. (Internally, of course, Degiro keeps track of each client’s claims against the effectengiro, but formally that is not the same as running multiple actual accounts, each of which would be covered by some protection mechanism).
A couple of interesting tidbits from the HIQ report:
8.1.1: HIQ uses a custody-account for its dealings with DeGiro. In other words, DeGiro is not allowed to lend out HIQ’s positions. The fact that HIQ declines to use the default but riskier account type of DeGiro’s that includes stock lending must make the normal clients of DeGiro feel really good about themselves.
15.1: Here, for the first time, it is admitted that HIQ was in fact the ONLY client of DeGiro to have used “join orders”. BIG SURPRISE!!! Not. There’s your proof (again) that HIQ was on the other end of the inhouse-matching by DeGiro. The reason for using this order type? “To earn the bid-ask spread”. Well duh! “The use of this order type had a positive effect on the Fund’s results.” Duh again. Ripping off clients is always good business. This must make those stupid clients of DeGiro feel even better about themselves.
15.1: More than 9% of HIQ’s trading activity was handled by DeGiro. Given that according to HIQ Director Jasper Anderluh, the Market Neutral Fund was already executing around 50.000 trades per day in 2013, this implies that DeGiro was processing upwards of 1.2 million trades annually for HIQ. In other words, around 50% of DeGiro’s transactions [2.5 million in 2014] came about thanks to its own hedge fund. Talk about exaggerating your market share!
Side remark: for on-exchange transactions, DeGiro is more expensive than the prime brokerage services of ABN AMRO that the HIQ fund also has at its disposal. Therefore, when acting in the best interests of its investors (as HIQ is required to do), HIQ should NEVER seek to trade ON EXCHANGE via DeGiro rather than via ABN AMRO as its Prime Broker. Assuming that HIQ acted in the best interests of its investors, this implies that HIQ did those 1.25 million transactions OFF EXCHANGE via DeGiro, i.e. 1.25 million inhouse-matched trades against other clients of DeGiro’s. This would already explain ALL of the 2.5 million transactions that DeGiro handled and furthermore imply that every fucking time a client of DeGiro trades, he/she trades against HIQ!!! The alternative is that the HIQ managers sometimes choose NOT to act in the best interest of its investors and trade on exchange via DeGiro rather than via ABN, thus creating revenue for themselves – the people who run the HIQ fund own DeGiro – at the expense of the HIQ investors. Fuck me.
as every year, at this time of the year, we question who did well and bad. Unfortunately, Source Capital did not make it. As you read these lines, the firm is shutting down and firing (once again) their top trades.
Maven is doing great!
My prediction for 2016: De Giro will be the Zero
http://fd.nl/beurs/1129544/nieuwe-broker-introduceert-gratis-effectenhandel
I guess these guys have not read Jack’s articles YET
iDealing kiest een andere weg. Het Britse bedrijf, opgericht in 2000 en naar eigen zeggen in grootte de zesde speler in het Verenigd Koninkrijk, heeft volgens Bowman ‘de tussenpersoon eruit gesneden.’ Wie gratis wil handelen, doet dat buiten het orderboek van Euronext om. Prijzen komen van andere brokers. iDealing maakt daardoor geen kosten aan de beurs of aan clearing.
Critici vrezen dat het onttrekken van orders aan de beurs op termijn leidt tot verminderde liquiditeit en dus tot slechtere prijzen. Belangrijker is dat er een beperkt tegenpartijrisico ontstaat omdat er geen clearing plaatsvindt via een centrale tegenpartij.
‘We hebben het idee dat we de boel flink kunnen opschudden’
Directeur Foster Bowman van onlinebroker iDealing.
Gratis handel, maar niet kosteloos
In ieder geval lopen beleggers nu al het risico een iets slechtere prijs te krijgen, omdat ze niet kunnen profiteren van de bied-laatspread. Transacties worden niet halverwege de bied- en laatkoersen uitgevoerd, maar altijd op het ongunstige uiteinde van de spread.
So who is the counterparty (other brokers) for these trades ?
It is interesting to note that the FD newspaper (who seem to be good friends with their paying advertiser De Giro) explicitly warns about for the extra counterparty risk for trading via iDealing:
“Belangrijker is dat er een beperkt tegenpartijrisico ontstaat omdat er geen clearing plaatsvindt via een centrale tegenpartij.”
The FD also remarks that iDealing customers will pay in the bid-ask spread:
“In ieder geval lopen beleggers nu al het risico een iets slechtere prijs te krijgen, omdat ze niet kunnen profiteren van de bied-laatspread.”
Yet two months ago, when Jack pointed out the same counterparty risk for De Giro’s procedure of inhouse matching and De Giro’s clients losing the spread to the benefit of its own hedge fund HiQ who were given the exclusive use of a rather unique order type, the FD newspaper published an embarrassing article that tried to cast doubt over the validity of Jack’s arguments.
‘Journalism’ at its very worst.
Regarding Source Capital’s demise, may I inquire which top traders were still part of the firm? Did the company actually traded anything this year ? Is SC’s founder looking for opportunities in the market?
Hold on now, I thought the world’s top traders all worked at HiQ?
Every year somebody claims that Source Capital is shutting down or broke, last year even an eulogy has been published on this site. However, it always turned out that the company continued to do business as usual. So, statistically speaking, Source Cap is more alive than ever and ready for a challenging 2016.
COO Itay Gross might be looking for opportunities in the market.
His brother Bill has been poaching him to join his team at Janus.
Did Source Capital fire also the COO?
unclear. They did fire everybody else but it would not be too surprising if they will resume operations on a smaller scale soon.
While doing so, they can collect the bonus pool (if any) in their pockets.
This is creative finance at its best.
The problem with traders is that they have troubles switching job/career, they are condemned to keep trading, even if their alpha is gone since long time… they actually face a double problem: 1) nobody hires them as traders as the alpha is gone, 2) nobody hires them as non-traders as they do not have relevant experience in other areas. From the two problems 1) seems less sever, so they keep trying and trying… applying to worse and worse companies, until they hit the ground. Because of this inherent career risks, traders should be paid (when successful) several times the average salary of other jobs.
Back to your original question, they will most likely resume operations on a smaller and smaller scale, as they do not have alternatives.
Het blijkt maar weer eens hoe onkundig de AFM is. Dit zou bijvoorbeeld in de UK nooit kunnen gebeuren, waar de FCA een zeer professionele regulator is. Na het worldonline debacle komt er nu een nieuwe aan.
Beleggers kijk uit, je geld is beslist niet veilig bij een OTC broker met een AFM vergunning.
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