TOM has announced to shut down it’s stock trading venue. In a short statement, strange enough only available in Dutch, it claims the market share of retail stock orders is only between 10% and 20% of all shares traded. And with a market share of 1% in this segment, it’s a loss making operation.
So far for the marketing talk. Market share in stock trading isn’t the most relevant part. Making a profit matters. Running a stock trading exchange looks fairly simple and straightforward to me.
Trouble with HFT
The stock trading part of TOM came under heavy criticism by broker DeGiro. Even ever cautious professor Menkveld thought there’s something wrong with the orders routed through TOM’s Smart Order Engine. Binck promised to sue DeGiro for reasons nobody understands (which will never happen, as I predicted). DeGiro just demanded an answer to the simple question : did HFT benefit from Binck’s retail orders in stocks?
DeGiro was right
Apparently Binck and TOM have investigated the claims made by DeGiro. And hell, they are probably correct. Binck’s reputation was seriously hurt, so something needs to be done. Fixing the Smart Order Router isn’t easy, as getting the stock orders exactly at the same time on different markets is complicated. Read Flash Boys by Michael Lewis.
Shut down operations
An operation with little revenue and big risk in terms of reputation among investors. Easy decision. Frame it with an extra focus on Chi-X. In the options segment they are still doing fine with 50% market share. I bet they’re hoping everyone else will forget about their conflict with DeGiro. Because with this move, one could argue they fully admit their TOM Smart Order Router didn’t work. High frequency traders seem to have taken advantage of Binck’s retail orders.
* Update February 22th
Sources have told me the whole stock trading venue for TOM was nothing more than a required move to gain regulatory approval for opening the option market on TOM. And truth be told, this option market on TOM is working flawless. Depending on a few technical issues, I bet they will be passing the 55% market share against Euronext this year.
Willem Meijer was not amused by the theory linking the close of TOM stock market to DeGiro issue. According to him hardly any financial institutions (retail banks) connected to TOM stock smart order router. Because of this the liquidity providers left TOM stock venue. This wouldn’t match with the story of them making profits of retail orders with high frequency trading strategy.