A Global Perspective on HFT and Market Making. Hans Pieterse March 2015, Sao Paulo

Transcription

1 A Global Perspective on HFT and Market Making Hans Pieterse,

2 Agenda Introduction Optiver Definition HFT Benefits HFT Role and benefits of a Market Maker Case Studies in Brazil: MM options and AMBEV Questions and answers

3 Company Overview Optiver is one of the largest global Electronic Market Making firms and acts as a global liquidity provider in a wide range of products; No other business lines: Only trading for own account; Optiver s headquarters are located in Amsterdam with additional offices in Chicago, Sydney, Shanghai, Hong Kong and Taipei; Optiver was founded in 1986 as a market maker in equity and index options on the European Option Exchange (now Euronext). All years have been profitable; Optiver is regulated by: Dutch Central Bank (DNB): responsible for the prudential supervision Netherlands Authority for the Financial Markets (AFM): responsible for the behavioural supervision (conduct of business) of trading entities

4 Company Overview Optiver is trading only for its own risk, with its own capital, Optiver has no customers; Optiver has a highly-educated work force of 754 employees of 35 nationalities, worldwide of whom 370 are in Amsterdam; 98% of the transactions are done electronically trade blocks telephonically; Connectivity to 50+ exchanges and platforms globally; Scalable and proven technology infrastructure and development; Optiver is independently owned by (former) staff members, management and supervisory board members.

5 Global Reach Connectivity to 50+ exchanges and platforms globally Europe Key markets: Borsa Italiana, IDEM, LSE,Eurex, NYSE Euronext Liffe, Deutsche Borse Amsterdam US Chicago Key markets: CME Group, CBOE, NASDAQ, NYSE, ISE FTE by office Shanghai Taipei Hong Kong Asia-Pacific Key markets: ASX, KRX, HKEx, Taiwan, TSE, SGX, NSE Amsterdam: ~370 Sydney: ~220 Chicago: ~140 Hong Kong: ~2 Shanghai ~12 Taipei: ~10 Total: ~754 South America Key markets: Bovespa BM&F Source: Optiver

6 Optiver in Brazil Main strategy: market making First trade on BM&F Bovespa in 2010 Appointed by BM&F Bovespa in options on 14 different stocks, ibovespa index and ETF s Trading index futures, equities, ETF s and BRLUSD derivatives Trading DMA via ICAP and Credit Suisse Local custodian: ITAU

7 Some definitions MiFID II definitions high-frequency algorithmic trading technique means an algorithmic trading technique characterised by: infrastructure intended to minimise network and other types of latencies, including at least one of the following facilities for algorithmic order entry: co-location, proximity hosting or high-speed direct electronic access; system-determination of order initiation, generation, routing or execution without human intervention for individual trades or orders; and high message intraday rates which constitute orders, quotes or cancellations;

8 What is HFT? HFT is a technology, not a strategy Characteristics: High volume of trades Short holding periods No significant end of day positions Large numbers of orders Latency sensitive Business model: Continuous liquidity provision Used by many market participants e.g. brokers, banks, hedge firms, principal traders

9 Benefits HFT Make markets more efficient Expands and lowers costs of access to information and markets Academics supports the conclusion that HFT benefits overall market quality Reduces spreads Adds liquidity Maintains pricing efficiency in markets Reduces volatility

10 Benefit: Tighter spreads Effective Bid-Ask Spreads from Rule 605 Reports

11 Tokyo Stock Exchange: Introduction of Arrowhead Enhanced Depth After the introduction of Arrowhead, liquidity has increased for almost all stocks Depth: November 2009 versus March 2010; within 50 bps from mid-price Largest Cap (Core 30) +62% Large Cap (Large 70) +51% Bid Ask Bid Ask (JPY millions) +88% % (JPY millions) Mid Cap (Mid 400) +72% Small Cap (Small) +139% Bid Bid Ask Ask (JPY millions) +67% (JPY millions) +126% M ar.-10 Ask N ov.-09 Ask M ar.-10 B id N ov.-09 B id Source: Tokyo Stock Exchange, Inc.; Depth is the total value of orders within 50bps of the BBO (number of orders price)

12 Role of Market Makers Optiver as a market maker provides continuous, two-sided markets (bids and offers) on the Order Book supporting the secondary markets with competitive prices in a wide range of products and on a large number of exchanges. So there is always a counterparty for every order which instils confidence in the market, attracting more buyers and sellers leading to lower required risk premiums Low risk premiums allow companies and governments to raise capital efficiently Market making: 1. lowers the cost of raising capital for companies and governments 2. lowers the cost of trading for investors

13 Opportunity Tighter spreads = More transactions (liquidity drives liquidity) = Higher share price Improved liquidity will allow for better execution in case of a share buyback or follow-on offering

14 Electronic Market Making Blackrock, April 2014: Electronic Market Making helps buy side firms to find best execution for their clients. Ödegard and Skeltrop, June 2011: Market makers contribute to a significant reduction in liquidity risk and cost of capital for listed firms. Menkveld and Ting Wang, January 2009: Market makers improve the liquidity level, reduces the liquidity risk, and generate an average cumulative abnormal return of 3.5% of a stock.

15 Case study 1: AMBEV Market Making Optiver started as a Market Maker in AMBEV shares on February 4th Initial market improvements: 1. Spreads tighter than 2%: January versus February 2. Average volume on bid and offer if spread is 1 cent

16 Case study 2: MM Options Optiver s participation in the Option market making programs on BM&F Bovespa has led to notable increases in liquidity. 80% 70% 60% 50% 40% 30% 20% 10% 0% Market Makers for Options (Aug/12) Participation of Foreign Market Makers Increases in Volumes Traded just after the introduction of Market Making Programs 1 : ItauUnibanco: 30% Ibovespa: 47% Usiminas: 190% Bradesco: 58% Gerdau: 68% PreFM PostFM 1 BM&F Bovespa, Providing Trading in a Sound Marketplace Report

17 Conclusion Market makers: 1. Tighten spreads for options and shares in Brazil 2. Improve liquidity in options and shares in Brazil

18 Questions and answers Hans Pieterse,