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Scrocca, the liquidity provider king

24 comments / October 23, 2011

In the past Euronext Liffe used to have an auction in market maker roles every six months. This has been changed, and all roles have been auctioned. This selection process is based on the performance of the market maker in the past year. Quoting tight and for size will earn you brownie points. Generally speaking, the big stocks and the index are always in great demand – and the tiny illiquid option classes are hard to fill with liquidity providers. Compare Royal Dutch Shell with Mediq.

The end of weekly options in Philips and KPN

With the trading fees charged to retail investors it won’t come as a surprise the weekly stock options aren’t popular. The weekly’s in Aegon are still okay with Optiver, IMC and Scrocca signing for the quoting obligations, but ING and Mittal weekly’s are depending on a single market maker (Nino). The weekly options in Philips and KPN will be deserted after November 1st. Guess Euronext will halt trading in these options. Also note the dividend futures failed, the screens are empty.

Scrocca the new liquidity provider king

The graph shows us the amount of primary market maker roles (blue) and competitive market maker roles (red) per firm. The Sloterdijk based firm Scrocca is quoting the most option classes. True believers in the quoting approach, but completely absent in the AEX index options. All Option is still having several roles too, but most of their PMM roles are in quiet illiquid stocks. Note the overview of liquidity provider roles will change in February 2012, after results of play off procedures will be announced. Always good for the competitive spirit, will get back to those matches later.

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We eat what we kill

24 comments / October 22, 2011

A witty email is buzzing around in the dealing rooms, a Wall Street’s response to the Occupy movement. Truth be told, I’ve seen it before a couple of years ago in a slightly different version. This one was already posted in the comments a few days ago (thanks for that) – but hey, it’s worth a full post. 

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We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. I didn’t hear America complaining when the market was roaring to 14,000 and everyone’s 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I’ve never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?”

#OccupyAmsterdam, great news for Euronext

26 comments / October 16, 2011

Two weeks after the bell ceremony by Princess Máxima, there’s another golden opportunity for the public relations department of Euronext Amsterdam. The silly pack of protesters of the Occupy movement decided to stay on the Beursplein. For analysis of their (lack of) demands and goals seek elsewhere. These people camping on the Beursplein are one of the best things happened to Euronext this year. It will give strength to the image the heart of the financial world is indeed at Beursplein 5. Suppose Euronext will give them a free lunch tomorrow.

Euronext NYSE/Deutsche Boerse versus TOM

Still pretty unclear how TOM will handle the retail order flow in options. Another issue unsolved are the index options. The AEX index is a registered trademark, and can’t be copied by TOM. Couldn’t find this distinction in the Alex/Binck press release, but I’d say nothing will change for the index options. Trading won’t move to TOM. However, support for TOM from unexpected corner. The EU has 3 main objections to the merger for NYSE and DB, one of which is a “more liberal selling of index licenses”. There it is.

Update on TOM / AEX

The AEX index is a trademark owned by Euronext. However, under the new MIFID II directive, an exchange is no longer allowed to claim an index for trading. In other words, when MIFID II is approved end of 2011 the TOM exchange can capture all retail flow from the AEX Index options too. Being the most heavily traded option class this certainly isn’t a minor detail.

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More flavors for quoting at Euronext

6 comments / October 10, 2011

In the light of the current TOM discussion it’s a little bit a spoiled party, but Euronext Liffe will introduce new flavors of liquidity provider schemes. In the current set-up, market makers in options can apply for two different roles:

Competitive Market Maker (CMM)

Obligation to quote at least 10% of all calls and puts in an option class. In return, they get lower fees and some bandwith to send and update quotes. In reality this means the trader can avoid difficult long term options, and has to stay away from the deep in the money options. Funny thing is they can avoid their quoting obligations when going on a holiday a few days a year. Broadly speaking, there are unlimited places for CMM roles.

Primary Market Maker (PMM)

Obligation to quote every call and put in an option class. A lot more bandwith than the CMM, but can’t avoid trading long term options when desired. Also, there’s no possibility to stop quoting for a couple of days. There are a limited number of PMM’s per option class, usually around four. A little more in de AEX index options. Difficult to obtain, as it is a closed shop.

This month all option classes will be auctioned again among the market makers. Will be a good opportunity to see who will be quoting which option class in which role. It’s an interesting topic to discuss the benefits of being a liquidity provider when TOM will take a lot of flow anyway. In addition, still trying to find out how TOM will arrange to trade on Euronext prices – maybe they pass through the orders themselves immediately on Euronext but this raises more questions.

Extra Competitive Market Maker

The new flavor of Liquidity Provider is the Extra Competitive Market Maker (CMX). Basically, this is a version of liquidity provider between PMM and CMM. Instead of 10% of the calls and puts, 30% needs to be covered with quotes. In return for this commitment, more bandwith is supplied. This CMX looks to be made for market makers who wish to quote everything like a PMM, but are scared for the long terms.

The question will arise why one would want to quote anyway. It’s a serious risk and the rewards are diminishing as a lot of order flow will trade on your sharp prices, but at another exchange against another market maker.

Link (pdf)

Bits of Freedom

Last but not least, the ugly banner on the right for the successful organization Bits of Freedom. Ignore the angry birds stuff and donate a few bucks, they need it. They stand up for freedom on the internet, worth fighting for.

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TOM, the parasite exchange

59 comments / October 7, 2011

Fresh e-mail from my broker Alex tonight, highlighting all the tremendous benefits TOM will have for Jack the retail investor.

Just in time, because my investment portfolio has seen better days. Alas, no such positive thing. Retail investors won’t see a penny and market makers are forced to leave Euronext for Tom. Liquidity providers on Euronext are running a showroom operation.

1. The fees for trading options at Alex and Binck aren’t lowered. The money saved with matching retail option trades on TOM instead of Euronext is not passed on to clients. Only when a better market exists on Tom, investors would be better off. That’s a hypothetical situation, as the quotes on TOM won’t be any tighter than Euronext. See next point why the market spread on TOM will be wide.

2. All retail trades will be matched on TOM. When there’s a better price on Euronext, your order get executed on TOM against the Euronext prices. Some kind of a copy paste procedure. This means the option orders from Binck and Alex customers will never reach the Euronext markets again.

This time Euronext has got a point. Euronext is running a showroom for the option market with the liquidity providers as salesmen. Customers are forced to do their transactions somewhere else. Assume, for sake of the argument, Euronext decided to call it a day and stop the whole option market – could TOM just continue with their lean organization? Guess not.

All market makers will be forced to connect to the TOM MTF, based somewhere in Scandinavia, to be able to compete for retail orders. The responsibility for price discovery stays at home at Euronext. The consequences of this TOM MTF are far reaching, think about it for a while. To be continued.

Link (Dutch, including a video).

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