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Flow Traders wants to colonize markets with its approach to trading, but its core business is coming under attack. The Corona is on rotation, but the Heineken is a permanent fixture: Up one flight of stairs, the atmosphere is very different. Behind a door that can only be opened with a security pass is by far the largest trading floor for exchange-traded funds in Europe. The trading volumes are those of a major Wall Street bank, but the refrigerator—and especially the pub, with its arcade games, pool table, and giant television—is pure startup.
While most firms allow some risk in their trades, Flow uses a more mathematically intensive and expensive approach to eliminate as much risk as possible. This year the firm will undergo its biggest transformation since it opened for business in Rietberg and Dijkstra say the move into currency trading is a natural evolution of the business. That may be, but Flow also badly needs to find a new way to grow: In the first three months of , its profit dropped 41 percent as quiet markets reduced its ability to earn money from trading.
In some markets, the pool of income available to algo trading firms is shrinking as competition increases from established trading companies looking to expand into new asset classes.
Flow is at a crossroads. Its distinctive approach to algorithmic trading could enable it to colonize other financial markets—or it could shrivel as rivals attack its core ETFs business. I think they will reevaluate every year whether this is working.
Roger Hodenius was working as an options trader at Optiver Holding BV, a computerized trading firm, when he realized that ETFs, then in their early days, would become a major asset class in their own right.
Their timing was fantastic. Sharp and intense, the year-old still stalks the trading desks, studying screens and quizzing traders. As part of its planned foray into the currency markets at the end of this year, Flow has hired a foreign exchange trader from a Wall Street bank to improve its knowledge of the asset class. The company declined to identify the person because the FX project is still at an early stage. Now it wants to make prices as well, a step that would see it become a market maker for currencies.
Dijkstra discloses that, after FX, Flow plans to expand into bonds. The plan is the same as for currencies: Hire a specialist from a major bank to get started, then turn things over to the existing trading desks.
It attributes the stellar run to its use of deterministic modeling, which produces definite outcomes, not probable ones. Deterministic modeling has its downsides: That means Flow has to trade more than its rivals to compensate for its smaller margins. When you make only 0. We trade against A and B. We make a very, very small margin on these products. Can it really be that straightforward? It has to be. It almost feels like a philosophical question to me: Can you ever be perfectly hedged? There always has to be some risk of market dislocation.
Every ETF trader has to hedge positions using the underlying securities or futures contracts. That exposes Flow to an unavoidable source of risk: I think the errors are very small, but there will always be some profit-and-loss risk.
Flow buys and sells the ETFs that no one else will touch. Flow will adopt a similar strategy when it moves into fixed income and FX by concentrating on hard-to-trade bonds and currencies outside the 10 most traedwinded. Difficult-to-price ETFs are also the most profitable to trade. The giants of U.
It takes time to build such a network of pension funds and asset managers. Flow has some of these counterparties. At Flow, traders who want to skip the Heineken can hit the fully kitted-out gym off the trading floor. To avoid thinking like one, sometimes it needs a little outside help.
Hadfield covers market structure in Europe. With assistance from Tanvir Sandhu and Joost Akkermans. Facebook Twitter LinkedIn Instagram. Share on Facebook Share on Twitter. June 14, ,More...