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.
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.
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.
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.
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:)