Optiver's Botman details volatile markets experience, looks for new trends and argues against SIs
Originally part of that options and derivative trading specialism that came out of Amsterdam in the 1980s, Optiver is now equally well known for its ETF business.
Maarten Botman, a senior ETF trader at Optiver, explains that the firm was founded in 1986 and moved from solely trading index options to including the Delta One trading environment when exchanges went electronic, trading cash equities, futures and ETFs. The business is still divided into options trading, the largest part of the business, and Delta One activities, of which ETFs is easily the largest portion.
The firm has over 1,000 staff globally with 500 in Amsterdam. “As a market maker, what we do is provide continuous liquidity to exchanges and directly to end users outside of the exchange on a request for quotes (RFQ) basis,” Botman says.
Optiver focuses on equity ETFs, quoting on everything but specialising in ETFs, which reflects their background in index and single stock options.
“If you trade options on the EuroStoxx 50 or the FTSE 100 you get exposure in terms of risk and market direction and you can offset that by trading ETFs,” Botman says. “It ties in nicely with our options trading business.”
“We are used to dealing with risk in this sector so our pricing is accurate in these indices because we can trade options and futures on the same underlyings.”
The market volatility in the first quarter of 2020 was ‘challenging’ Botman says. “You can imagine because as an ETF market maker, we are providing liquidity in ETFs based on their underlying value. So if the FTSE 100 shares on the futures are very liquid it makes the ETF very liquid – we have to base the bid/ask spread on the ETF’s underlying liquidity but when the market tumbles, it disappeared completely and you have to find alternative ways of pricing, you have to find new correlations.”
Some exchanges also halted their indices, but as Botman says, in real life, people want to continue to trade, forcing the market maker to extrapolate and reference from other market sources.
“In a nutshell, the main challenges have been the underlying markets that we base the ETF prices on,” Botman says. “They became more volatile and less liquid and markets closed – it mainly became an issue of finding liquidity and translating alternative ways to price. We continued pricing and fulfilling all requests.”
He notes that the difference between the electronic market makers and the banks became more obvious as the electronic market makers could price as they had automated everything, while banks struggled.
“Our market share went up quite a lot and the feedback from counterparties was that electronic market makers won all the market share as they were the most robust,” Botman says.
“ETFs also proved to be very robust and there had been many questions from regulators before all this happened as to how ETFs would behave if the market tumbled, but it turned out that everybody was still capable of trading ETFs and providing competitive prices.”
Automating is the obvious and big trend in the market makers’ world along with the RFQ process that allows off exchange automatic execution through electronic trading platforms.
A consequence of MiFid II was that some firms launched Systematic Internalisers (SI) which act as a mini exchange that counterparties can connect through, but Optiver has not gone down this route.
“I think everything should be on the normal exchange because only then can you get pre and post trade transparency rather than this massive fragmentation in the ETF and cash equity industry,” Botman says.
“We are one of only a few market makers without an SI, which we think are detrimental to the industry. Trading on exchange increases market depth, while SIs cause fragmentation, resulting in sub-optimal price formation, which comes at the cost of the end investor” he says. “If everyone starts trading on SI at one point it won’t generate any returns for market makers – if people stop trading on the exchange the bid/ask spread will deteriorate.”
Growth areas in ETFs that Optiver has observed include, of course, ESG. “ETFs are a mature product now but we see big inflows into the ESG ranges as many asset managers have switched from the traditional indices into ESG indices. It’s become a very important theme for us.”
Other new themes don’t get Optiver’s attention as easily. For some niches, the firm needs to make a business case before they can price them. “But we do see a future in ESG and we should provide the same liquidity in ESG as in the more conventional indices,” Botman says.