Optiver Amsterdam

Dutch lift lid on a high-frequency universe

With its vaulted ceiling and vintage ticker boards, the old Amsterdam Stock Exchange is not the most
obvious place to look for "high-frequency" traders.

But the floor of the exchange, built in 1914, is where about 100 traders can be found at All Options, a
Dutch options trading firm that engages in high-frequency trading strategies. The floor was last used in
2002 when the Amsterdam options exchange closed. Now its vast trading hall has been recycled,
housing rows of trading "pods" used by All Options to trade options on electronic exchanges.

All Options and a handful of other similar firms based in Amsterdam offer a window into the secretive
world of high-frequency trading (HFT), a phenomenon that has shot to prominence as regulators
investigate how technology has super-charged the way markets function.

HFT refers to various styles of electronic trading that harness computer algorithms to trade automatically
in and out of stocks, options and futures hundreds of times in the blink of a human eye.

Such trading has come to account for more than half of all trades on share markets in the US and
Europe, and is also common in options markets.

But the practice has continued to court controversy since the "flash crash" of May 6, when US stocks
plunged in a matter of minutes.

Yesterday, algorithms were also in focus as it emerged that Infinium, a US company, was co-operating
with an inquiry by CME Group after a mistaken oil trade on a day when crude futures surged nearly $1 a
barrel in less than a minute.

Yet in Amsterdam, home to the oldest HFT community in Europe, such groups say in rare interviews that HFT is a vague label that masks legitimate trading strategies that have helped investors by narrowing bid-ask spreads, adding liquidity and lowering transaction costs.

They say that their role is mostly as market-makers, providing constant bid and ask quotes in the markets
just like the old pit traders of Amsterdam. Remco Lenterman, managing director of IMC, one of the companies, says: "We believe that the existence of these predatory strategies is based on a myth rather than reality. We use the same publicly available data that is available to all, and we do not have insight in
the intentions of other market participants."

London, not Amsterdam, may seem a more obvious location for HFTs. But the Dutch city has a trading
tradition going back to the 17th century when the first derivatives contracts were written on the shares of
the Dutch East and West India companies. The Dutch were also pioneers in options trading, launching the first European options exchange in Amsterdam in 1978.

That produced a generation of traders, many of whom ended up forming their own HFTs such as All Options, IMC, Flow Traders and the biggest, Optiver.


Jelle Elzinga, a former options pit trader, is a board member of Optiver. Speaking from the company's
glass-fronted office in Amsterdam's Zuidas business district, he says: "There is a misperception that HFTs
are speculators who move the markets to extremes.

"In fact the vast majority of HFT involves looking for very small arbitrage opportunities ... These actions do
not create volatile markets; they close gaps across markets, increase market efficiency and ensure that
there is always liquidity."

After the flash crash, many HFTs were blamed for quitting the markets, exacerbating the crisis. Optiver
says it continued to provide liquidity "during and after the flash crash".

Inside its trading room, the layout is like many bank-dealing rooms: rows of desks with computer screens.
Yet there are no telephones because Optiver has no clients and, like its rivals, trades using its own
money.

Optiver does not disclose how much money it makes but Mr Elzinga says the group has never had a
lossmaking year. That has helped it grow from its Dutch base to employ 600 people across Amsterdam,
Paris, Sydney, Hong Kong, Taipei and Chicago, the US city that is home to similar market-making firms
that grew out of the trading pits there - such as Getco and Peak6, both Optiver rivals.

Traders come straight out of university and candidates will not even be considered for interview unless
they pass an eight-minute test designed to weed out those weak on split-second numeracy. "We might
ask ‘What is 0.3 divided by 0.0005?' - that sort of thing," Mr Elzinga explains.

He admits that Optiver "tends not to have views on, or a lot of knowledge about, stocks in terms of how
companies are doing".

The company will hunt for tiny aberrations in the relationship between two assets. Or its traders may use
algorithms to buy and sell similar financial instruments simultaneously to benefit from a discrepancy in
their price relationship - for example, as between the shares of BP, the oil company listed in London, and
the company's American Depositary Receipts in New York. This is usually called "statistical arbitrage".

Mr Elzinga says this is a small part of the business. "It is not at the centre of Optiver's strategy."

Yet there are some strategies that worry big asset managers. They include "quote stuffing", whereby
HFTs send thousands of orders into an exchange, only to cancel them microseconds later. Many suspect
that this, far from being liquidity provision, is designed to confuse rival traders into thinking there is "real" activity in a certain stock.

Mr Elzinga says: "We do think ... hat regulators should take a closer look at issues such as quote stuffing
and flash orders."

Like its US rivals, Optiver has started to explain to regulators what the company does and doesn't do,
aware that the issue of HFT is at the top of regulators' agendas. Asked to describe high-frequency
trading, Mr Elzinga says: "It doesn't make a big difference what you call it. We are still doing what we did 20 years ago. Then, we did it in the pit and had to yell out. Now we do it on a screen."

26/08/2010 Jeremy Grant Financial Times