MMX exit from Amsterdam

68 comments / February 13, 2013

The other day when checking the Euronext excel files for the Primary Market Maker play off, I noticed something strange. A small market maker has completely left the Euronext option market. MMX, a startup consisting of a couple former All Options traders, signed for more than a dozen quoting licenses last year – and it appears they have thrown in the towel when it comes to the options on Royal Dutch, Philips, Fugro etc.

It’s a difficult market, and it wouldn’t be completely unthinkable when a market maker is forced to shut the doors altogether. On the other hand, MMX may feel themselves more comfortable trading outside the Eurozone. They are listed as market maker for almost a hundred single stock options in London (xls). Usually only with the ever present Timber Hill as company. Sometimes alone, lonely quoting in option classes such as Fresnillo and Barratt Developments – to name but a few. Odd.

Play off results Euronext

16 comments / February 10, 2013

A small follow up on the play offs for primary market makers in half a dozen stock options. It was announced in October and held during December and January. With rival option exchange TOM capturing a lot of market share amidst shrinking volumes, quoting tight on Euronext is getting a little bit yesterday’s game.

Quoting the tightest spreads will win the play off, and the obligation to quote the options for the rest of the year. For more information on the liquidity providers, check here at NYSE Euronext’s website. The current situation seems to be IMC is losing all their primary quoting rights to one of the three smaller market makers 323, Caerus and Nino. Doesn’t say anything about profitability, though.

Ahold : ~~Caerus~~, ~~IMC~~, Optiver, 323 Trading
Aperam : ~~Caerus~~, Nino
CSM : Caerus, ~~323 Trading~~
Fugro : ~~Nino~~, 323 Trading
KPN : Caerus, ~~323 Trading~~
Randstad : ~~Nino~~, 323 Trading
SBM Offshore : Nino, ~~Leopark~~

It’s a mixed bag. Nino get the primary market maker license for SBM and Aperam, Caerus takes KPN and CSM and 323 Trading will be happy with Fugro, Randstad and Ahold. As expected, Optiver did defend their position in Ahold.

Last week TOM caught 19% of the total option volume (pdf). Their new daily and weekly options on the AEX has been quite a succes with 42% and 31% respectively. I assume they will roll out their business model to monthly AEX options pretty soon.

Confusion on SNS stock options

34 comments / February 3, 2013

All your SNS are belong to us. In a swift move the Dutch state nationalized the bank and insurance group SNS Reaal on February 1st. It was in the air for a while, but still shocking to see shares drop from 84 cent to, well, zero.

As expected, trading in shares SNS is suspended at Euronext. The option market on SNS Reaal (SR) has been closed as well. Not possible to trade through the prof market facility nor exercise any options.

The big question mark is what will happen with the existing option contracts in SNS. The last closing price of the stock is still 84 cent. And exercising put option contracts isn’t possible. There has been some speculation in the news (fd.nl) and by Cees Smit on IEX (both Dutch). I believe both of them missed the point.

There are rules. The latest set of rules regarding corporate actions doesn’t have a paragraph on nationalization issues. But let’s suggest this is what we would call special circumstances.

6.9 Special Circumstances

If the underlying Share of the options and/or futures is no longer tradable and/or deliverable due to circumstances not described in the Corporate Actions Policy, NYSE Liffe will decide on a case by case basis what the consequences for the options and/or futures will be, and will inform the regulator of the relevant NYSE Euronext Market Undertaking on which the options and/or futures are traded before issuing a Corporate Action Notice.

In any other scenario (regular delisting), cash settlement would be the road ahead. Here Euronext Liffe can decide what to do. Settle all the options with the stock at zero will most likely be their decision, against intrinsic value (see rules, 6.5 Liquidation). Any other scenario against the closing price of Thursday would harm the confidence of investors in the market. The cautious investor being long stock with put options as protection can’t be ignored.

Another possibility would be to resume trading in SNS claims, which eventually could get some little value after legal battles in the coming years. And in the meantime, everything could be settled as normal. Euronext Liffe has got two weeks to go before the February expiration to announce their solution.

WEBB buys Caerus

304 comments / January 16, 2013

It’s has been confirmed WEBB Traders takes over Caerus. They have a lot in common. They are both start ups launched after the demise of Van der Moolen. WEBB is mainly active on the cash market, and Caerus is market maker in the derivative business.

No surprise

It doesn’t really come a a surprise. In the last couple of months we’ve seen brokers merge, exchanges and now traders are joining forces. Last year’s revenues have been disappointing all over the place, and at the same time running a trading operation isn’t getting any cheaper. Transactions costs are under pressure, but fast co-located connections to a dozen exchanges are pricey.

Merger makes sense

“Our operations are very complementary, and there’s a lot of synergy”, as confirmed by a stakeholder. Four years ago I couldn’t understand the rationale of the merger between two option market makers (All Options / Saen). This one makes sense. Lot of fixed costs to share and not having to fire half of the company. Caerus will leave their office at Beursplein 5 to move in with WEBB. Together the new combination will have a headcount of 30.

A gun shot wedding

On the other hand, let’s be fair : it’s also a shot gun wedding. When making millions, nobody would even consider selling the firm – no matter how much synergy to be achieved.

The road to consolidation isn’t over yet in the financial markets. Economies of scale is required to survive. Last year several tiny market makers decided to call it quits. Remains to be seen WEBB/Caerus can compete with the larger fish.

Ethanol and Kospi trading losses

96 comments / January 8, 2013

Knight went down on a single system glitch. Buttonwood lost it all on a rogue trader in Ethanol futures in December. This product is uncharted territory for me, but I’m told its closely connected to other commodity futures such as corn. The trader had a reputation among other Ethanol traders. According to unconfirmed chatter his ethanol gamble was in line with his image.

Here’s the chart of the Jul Ethanol CBOT future, Buttonwoods graveyard.

Another product from the other side of the world. The Korean Kospi future. An apparent software bug in an algo active in the Kospi future rocked the market. Turnover jumped 30% and the open interest increased with 19.000 contracts. Algo sent a small buy order for 1 lot. Fine, but 100.000 of those small buy orders may be overdoing it.

At a certain moment 110.000 Kospi futures assembled together on the bid. Around 25.000 bids were filled. Weird thing is this whole algo gone mad lasted for over an hour. As one commenter points out, the value of the 25k futures is around 3 USD billion. The losses are estimated at USD 8 – 15 million. Pocketmoney for some banks. But for the involved market maker, Eclipse, probably a near death experience.

Graph from the entertaining Australian Investment Banker Cyclist. Unfortunately not in the same detail as the ethanol graph, but at least lots of colors.

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