The largest Dutch online bank Binck announced a joint-venture with market maker Optiver. All orderflow of it’s retail customers will flow directly into the books of Optiver. It will start with stocks, but the goal is to expand the operation to derivatives as well. The plans were known before, but now it seems it will be reality soon.

Optiver will make a market in all major stocks on the the joint-venture labelled TOM, which stands for The Order Machine. This is a very suitable name, as it will be just a simple machine copying the prices of the real Euronext market. The financial markets authority approved the operation.

This joint venture is a good thing for the online bank Binck. In stead of paying transaction fees to Euronext, it can keep the money. Maybe a slight discount could be given to the customer, but there’s no competition so that’s not necessary. By selling it’s customer flow to professional market makers it’s generating extra income.

Offering a best execution by taking account different exchanges (Euronext, Deutsche Borse, Chi-X,..) was a possibility, but the company seems to focus on selling the customer flow to Optiver.

Copying the prices of the real market is easy as long as you’re fast enough. All trades generate a little money instead of costing a little transaction fee. Optiver can decide to stay with the resulting position or in the worst case scratch it on Euronext. It will never make a loss.
Second, it will have more information on the Euronext order book than competitors. Limit orders which won’t be executed will appear in the books of Euronext. Only Optiver knows where those limit orders are, how big they are and the chance of remaining there when the market turns. Assume a situation Optiver did a large option trade and needs to sell shares in a stock like Akzo. They’re not forced to send two sided quotes, an iceberg offer on their TOM system will do the trick.
Finally, the best thing is rival traders on Euronext are forced out of business as the major source of retail flow will vanish. Less competition means more profit for the powerhouse.

Binck customers may see a slight discount on the transaction fees. As there are no costs involved for Binck and Optiver can only make money in the trades, they should be getting paid by Binck instead of paying transaction fees. Furthermore, Binck’s customers will help creating a monopoly position for Optiver. Especially on the option market the spreads will widen and a disount on the transaction fee will turn out to be a joke.

Quoting stocks will turn into a waste of time and effort for the rest of the market. Most retail orders will be filled by Optiver, so quoting the stocks will be a risk without reward. Some traders will have a hard time, some companies will quit the market altogether.

Boycot Binck
I wouldn’t like to see Optiver having a first pick on my orderflow with Binck, so I’m leaving this broker. Other brokers are cheaper anyway – just plain laziness to stay with Binck for the last years. Too bad the troubles are too abstract for most clients.

* Update 24/6
Hat tip to IEX for their own neutral coverage of the story, summary of this post and a reaction by the official spokesman of the Binck/Optiver joint venture (all three links in Dutch).