Electronic Market making
Optiver started in 1986 as a market maker on the Amsterdam-based European Options Exchange (EOE) and today market making is still our core business. Currently we ‘make markets’ on all major exchanges in Europe, the United States and Asia-Pacific.
As a market maker Optiver continuously quotes both bid and ask prices for financial instruments and therewith provides a ‘two-sided market’ in those instruments. Natural buyers and sellers may enter the markets at different times and by stepping in between Optiver allows buyers and sellers to immediately transfer their risk, ensuring liquidity in the market and execution certainty for investors.
As a market maker Optiver usually takes no directional positions in securities. And we aim not to have any positions overnight and try to end the day flat (without any short or long positions).
Today the employment of automated, high speed trading applications is a prerequisite for a market maker to be successful. The use of sophisticated and fast trading applications enables a market maker to trade in higher volumes, with higher speed and tighter spreads. It also facilitates the processing of market data, the timely reaction to changing market conditions and therewith better enables a market maker to manage its risks.In the past decades technological advancement has had a profound impact on the way financial instruments are traded. These technological advancements have enabled investment firms to do hundreds of trades on several different markets faster than the blink of an eye.
This evolution in the marketplace has become known under the umbrella of high frequency trading (HFT), and has become a topic for fierce discussions in the recent past. This discussion is fueled by controversies such as flash orders and the rise of algorithmic trading strategies coinciding with the worst post-war financial crisis, blaming the practice for causing market volatility, withdrawing liquidity and not adding any benefits to the markets.
These circumstances have caused an overall negative perception of the industry which we believe to be undeserved. We think HFT is nothing more or less than an evolution of a system that has been in operation for decades, and was formerly known as open outcry. The fact however that this is a rather new phenomenon in combination with recent market developments sometimes raises fear or suspicion.
In our High Frequency Trading - Position Paper Optiver tries to explain what HFT is and why it is actually beneficial to the market and investors. We also try to refute often heard accusations of HFT harming the market quality or having unfair competitive advantages over other investors. Finally we discuss a number of proposed regulatory initiatives that are recently voiced to limit the impact of HFT and analyse the impact of these proposed measures on the financial markets.
You can download our High Frequency Trading - Position Paper here.