The Order MachineBreaking news from The Order Machine, or TOM for friends: Founders Optiver and Binck invited another firm to join the party. ABN AMRO Bank is acquiring a 25% stake in TOM and the new powerful shareholder will join the board. Currently, ABN AMRO is already acting as clearing member for trades on TOM. The press release explicitly states the bank may route its order flow to TOM as well.

This smart move has a few serious consequences. Initially, it is a smack in the face of Euronext. Binck and Alex are representing more than half of the Dutch retail orders, and if ABN AMRO commits itself to TOM, a large share of trading volume on Euronext may be gone forever. It looks like a real exchange. It is quite a surprise, after the initial set-up of sharing the profits between Binck and Optiver.

Next, the new member of TOM makes it very possible for the new multilateral trading facility (MTF) to become a success. Ignoring them and continue trading solely on Euronext isn’t a viable option any more. Majority of trades with a little margin will be executed on TOM. Nobody would rely on Optiver, but with ABN joining the pack, it suddenly looks a lot brighter.

The good news is, the transaction fees will go down faster than usual. On the other hand, expenses for IT systems and connections will soar and will threaten the existence of the small trading firms. Small firms may eventually become serious market participants, like Flow Traders who started small (however, I don’t think Calimero Trading has any ambition to grow big). While joining TOM’s electronic trading pit may be free of charge and the investments in new systems will be huge. Co-hosting the servers near TOM’s exchange somewhere in Scandinavia will be both expensive and probably mandatory. While it’s not a major problem to trade on London’s Liffe Connect from your Amsterdam based systems, connecting to the Nasdaq OMX servers deep in Scandinavia will be a completely different story. Costs associated with this operation would take the small market makers out of business. It’s hard to explain your tradingĀ  listed options on a Dutch stock or index, from an Amsterdam office, against other Dutch investors or traders in the Netherlands – over a network in the Arctic polar circle. Feeling old fashioned here.

At the moment TOM Trading isn’t trading anything at all. They have the license to trade stocks and act as a multilateral trading facility, but they’re not up and running yet. Something tells me it shouldn’t be too hard to fix it for single stocks. There hasn’t been a license given for trading options. Earlier on, CEO WILLEM MEIJER suggested option trading on TOM would commence before the summer 2010. The new target is the launch date of the option trading will start before the end of this year. And no, Willem – that is not going to happen either.

All statements in the press release are intended to pressure the other market participants into joining in, which would create a better argument at the financial regulators and other supervisory authorities. A couple of weeks ago Euronext’s CEO CEES VERMAAS already suggested starting a legal court battle against TOM. It’s all in the game.

Euronext should axe the transaction costs for option trading right now. The regulators will probably have to grant permission to TOM for starting the MTF on derivatives – although to protect the Dutch landscape of market makers it should require TOM to move the servers to Amsterdam or London instead of the North Pole.

Original press release TOM Trading (pdf)

Jack
Jack