Comments on Optiver-Binck deal

30 comments / April 16, 2009

Comments on posts on websites are highly appreciated. Mostly short views and opinions on other market makers and trading in general, it’s fun to read and now and then carry valuable clues of how trading firms are doing. Yesterday evening a comment was written on the proposed deal between market maker Optiver and broker Binck. It’s actually way better than the original post and deserves more exposure ; so here it is. Credits to the anonymous writer.

“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.”

VDM haunted by claims

1 comment / April 12, 2009

The only listed Dutch trading firm Van der Moolen has settled charges for improper trading within its US specialist unit back in 2004. It has sold the US specialist activities in December 2007 to the prestigious Lehman Brothers. One would expect this would end the stream of legal problems for the troubled firm. Wrong, according to the NYSE disciplinary actions list published April 8th.

In the summer of 2007 VDM specialist Brian Schaeffer mishandled the opening of a certain stock. He failed to maintain a fair and orderly market, and a stock opened $12,43 below the previous closing price – at $61,25. That’s a 25.000 dollar fine for the trader. Apparently mister Schaeffer wasn’t a junior trader, as he was seen explaining president Bush the magic of the stock market in the same year.

Second, the company VDM will have to compensate the investors for a total amount of $400.000, and will have to pay a 40k fine as well. This is incomparable with the recent 43 million dividend tax loss, but is nevertheless worrisome as it’s still VDM to pay the bills. The demons of the past keep haunting the firm.

On the same day this disciplinary action was released by NYSE, Van der Moolen nominated a lawyer to be elected in their supervisory board. Probably there’s another round of legal warfare ahead. Finacial newspaper FD must have reached a similar conclusion, as it assembled a couple of claims from different institutions on April 10th.

Play-off for market makers

15 comments / April 11, 2009

Twice a year Euronext is auctioning licenses for market makers in options. The market makers don’t have to pay for the right to send their quotes, they just have to fulfil their duty. The right to send quotes to the market is granted to the market makers who commit themselves to the tightest bid-ask spreads.

As these ELPS schedules are invariably set at the tightest quote settings, all market makers bid for the same conditions. The good part is that existing market makers never lose their license – as long as they are able maintain good quotes in the market. So no big changes over here. The big three (Optiver, All Options, IMC) will remain the dominant market makers. In a few places a new place for a primary market maker (pmm) will be created.

This is where the fun starts to kick in. For the new places market makers will have to fight for their right to quote. In Philips and SBM Offshore the best of the rest will have to send their tightest quotes for two consecutive months. Points are awarded for market presence, size and the tightest bid-ask spread.

Once the primary market maker license is granted, companies will have to keep on performing well or they may lose it next year. This is what’s treating Curvalue, part of the listed company Van der Moolen. It will have to defend its positions in Unilever and ING against eager beavers 323 Trading and Tibra.

The losers still can trade, though. A competitive market maker (cmm) can still send quotes, just a lot less and with less bandwidth. Because of the standard 5 cent tick size the quoting permissions are important.

The play-offs:

ING
Curvalue plays relegation battle against Tibra Trading.

PHI
Tibra and 323 compete for the new spot

UN
Curvalue plays relegation battle against 323

SBM
All Options and 323 compete for the new spot

Hard to predict who’s going to win. Curvalue seems to be in trouble, 323 is very small, Tibra still unknown and All Options may not be very serious on SBM. Time will tell.

IMC: You’re fired, buddy

24 comments / April 2, 2009

Trouble at IMC. Everyone needs a hobby. Some collect stamps, others paint miniature battlefields and the most nerdy of all write weblogs. At Dutch market maker firm IMC they have been collecting side activities. A free newspaper, a website for investors, asset management and some risk consultancy. And the remains of a bank. The era of conglomerates is still alive and kicking, core business is for sissies.

Confronted with a tougher financial climate a new reorganization is in effect at International Market maker Combination. More than a dozen of traders have been fired in march in the Amsterdam office. The IT department didn’t escape the job cuts either. Bad luck. However, no such thing in IMC’s other offices. Hong Kong and Chicago are outpacing their mother. New office space has been signed in the US. An unbelievable 52000 square feet on the entire 43th floor of Chicago’s Sears tower will be leased untill 2020. For comparison, that’s the size of a regular soccer pitch.

Dividend mystery at Van der Moolen

13 comments / March 26, 2009

Financial trading firms are notoriously secretive, and won’t release any information on their trading activities unless they are forced to do so. The only listed trading firm in Amsterdam, Van der Moolen, had to present their figures on 2008 results today. Apparently the chairman didn’t want to share any information at all, as their results left investors with more questions than answers. And I smell a rat.

Nasty surprise

The operational trading results on 2008 weren’t spectacular at first sight, and provided no details on surviving a year with some horrible events but lots of trading. However, the company had some unexpected nasty surprise ; a EUR 43 million provision for losses on dividend tax.

That’s extremely weird. As a trading firm you’ll often have some stocks in your books during the dividend season. You can reclaim your dividend tax at the authorities. Maybe you won’t get it in some countries, but then it won’t be a surprise as you know the rules.

No regular trading position

Second, large losses are common these days but 43 million is still a lot of money. As it’s only the tax part of dividends, the total received sum of dividend should be around 285 million calculating with a dividend tax of 15%. On average stocks have a dividend of 75 cent, that makes a total share position receiving dividend on around 380 million stocks. That’s a lot. It doesn’t sound as positions you will get during normal option trading. And if you did had this dividend exposure, it would have been a terrible losing position in a year stuffed with dividend cuts.

Only Van der Moolen

Third, no other trading firms have reported any trouble with tax authorities on reclaiming dividend tax. Larger firms like Optiver, IMC and All Options haven’t called the press to complain about the fiscal regime. This little tax thing is clearly only hurting Van der Moolen.

Van der Moolen had an alliance with a company called GSFS, experts in dividend stripping. According to CEO Richard den Drijver this had absolutely nothing to do with it. According to him it’s just a matter of dividend on long stock positions due to, say, short calls.

Not getting away with it

Having trouble with tax authorities in five or six countries and a tax investigation for regular long positions – that sounds unbelievable. Honestly, that sounds almost like some kind of tax fraud. And not getting away with it.

Amsterdamtrader