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All Options’ chief commenting on Saen

17 comments / March 24, 2009

Allard Jakobs gave an interview to the Dutch financial newspaper Financieele Dagblad. After some overly ambitious mission statements (world power), he commented on his recent acquisition of rival Saen Options. Most executives would remain cautious, politically correct and avoiding stepping on toes. Not in this case, and it turned out to be a highly entertaining interview.

First of all, the management of Saen Options really blew it. No organization apart from the trading desks and lacking a strategy. Everything was focused on trading and making money. Over 2008 Saen was marginally profitable, partly due to suffering from millions loss on trading Volkswagen options. The most curious quote was on the secretive nature of Saen. Some traders had a special condition in their contract barring them to talk about their trading with their own fellow traders within Saen. Sounds perfect for the company spirit.. what else to talk about?

It’s a relief All Options’ boss isn’t a believer of the “merger of equals” fairy tale. They own it, and will dominate the company structure and culture.

(Original interview in Dutch over here)

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Optiver-Binck deal threatens option market

4 comments / March 19, 2009

In June 2008 the Dutch option powerhouse Optiver announced to team up with the biggest Dutch retail broker Binck to create their own marketplace. Retail clients of the broker would do all their option trading against Optiver, under the assumption of equal option quotes. Within the ruling of the MiFiD, the European markets directive, this is indeed possible and legal. Other market makers and option traders should be allowed to see and trade on Optiver’s quotes too – but not from the start.

Market makers cry foul

Dutch market makers cry foul, understandably. With almost half of all retail orders flowing straight in the books of Optiver, they would see the size of the remaining market shrink. Small transactions with private investors are generally most lucrative ans easy compared to trading complicated arbitrage against hedge funds. Without a large share of retail flow the liquidity providers won’t be rewarded for quoting tight markets. Optiver will be able to copy all quotes from the market and present it as their own, and doesn’t even need to improve the quote.

Short run benefits

In the short run the Optiver-Binck deal would benefit the clients – as transaction costs will possibly be reduced. As I said before the losers would be the other market makers, but nobody will miss them anyway. Major players such as All Options and IMC may point their focus on markets outside Euronext. The future of the remaining market makers doesn’t look very bright. Sending tight quotes without trading is difficult and not rewarding. With a monopoly of Optiver option quotes of the rest may even widen – if they survive at a all. A lack of price competition may have foreseeable consequences. Optiver isn’t exactly afraid to exercise some market power.

Legal

On the other hand, the Optiver-Binck deal is probably legal. And without doubt Optiver is one of the most advanced Dutch market maker anyway, capturing a lot of market share without broker-deals worldwide. And although competition is generally fine for markets, it would be hard to imagine a market with seriously wider bid-ask spreads – that’s just not the way the world works.

Approved by competition watchdog

The Dutch fair competition body, the NMa, doesn’t see any problem and approved the alliance this week. The Dutch security market watchdog AFM will still have to make a decision on the subject. Other market makers will try their best to block the deal with legal procedures. It’s the only chance the have.

(Yes, the picture in this post actually has a distant link to this topic. It’s from a hilarious advertising clip from Optiver Australia:)

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Heuschrecke may sue Porsche

1 comment / March 16, 2009

SprinkhaanHedge funds are reluctant to accept their losses on the VW short squeeze. The German sportscar maker Porsche squeezed billions out of the financial Heuschrecke Not used to losing a battle against a bigger fish, hedge fund managers want the money back. Lawyers have been put to work to sue Porsche for manipulating the market. Their trade body, the Alternative Investment Management Association (Aima), is working on it.

There’s a minor problem, though. Porsche seems to know exactly what it has been doing, complying with all possible legal regulations. The German state have made the rules. Suing a nation for having an improper set of laws sounds like an interesting idea. The Germans are investigating the matter themselves as well. Bafin, the German financial watchdog, will release their view in the summer. Hedge funds don’t expect anything from Bafin, as uhm.. Porsche has fully complied with the law. Free advice for hedge funds and their lawyers. Forget. About. It.

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Join the dark side

0 comments / March 13, 2009

Trading is thin, and analysts from Goldman seem to have enough time left to do some silly research. Today analyst Peter Berezin announced holding overnight positions returned nice profits over the last 15 years. Buying at the close and selling in the opening yielded a 309% profit. The other way around, buying at the opening and selling at the close would have lost 58% over the same period. Overnight long positions in the S&P and short positions during the day yielded an impressive 507% profit. Figures don’t add up but we’re dealing with compounding returns.

The fear of holding overnight positions when markets abroad may tumble would be the root of this phenomenon. Curious how these returns would be during another time span, for example excluding the current crisis. Although there’s a theory constructed constructed behind it, my theory is this may very well be a neat example of a data mining bias.

On the other hand, this isn’t very new research. Traderfeed explored it already three years ago. Note that most fireworks takes place outside tradinghours, as macro economic US figures are released one hour before opening.

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Flat curve in option market

0 comments / March 13, 2009
I’m not a big fan of deriving directional conclusions from the option market. Put-Call ratios and open interest figures are mainly a source of misinterpretation. However, something strange is going on in the option prices at the moment across Europe. The curve is extremely flat compared to historical prices. Out-of-the-money puts are cheap compared to out-of-the-money calls. Apparently there’s no demand for further downside protection. No matter what time horizon is used in analyzing the volatilities ; the otm calls are getting more expensive every day. A few conclusions can be made. We’re not expecting any downside shocks anymore, we’ve seen the bottom or we are looking forward to some upside gap openings.
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