HFT Powerhouse Amsterdam Glimpsed Through Speed-Trader IPO

Flow Traders BV’s initial public offering will give the world another glimpse into the workings of a high-frequency trading firm. It also shines a light on Amsterdam, a powerhouse in the world of electronic trading.

Flow Traders, which announced its IPO in a statement Thursday, belongs to a cadre of Amsterdam trading firms -- alongside Optiver and IMC BV -- which count among the largest electronic traders in the world. The Dutch city has a rich history of stock trading going back to 1603, when a 3,000-guilder stake in the Dutch East India Company changed hands.

“I interact a lot with these firms and what they need are people who both understand processing of data algorithmically, and they have a feel for the market,” said Albert Menkveld, professor of finance at VU University Amsterdam. “Now, the latter part is something I would say is idiosyncratic, is special for Holland.”

Amsterdam, with a population of 820,000, is less than a tenth the size of New York City. Market pros reach as far back as the creation of the Dutch East India Company to explain the city’s trading prowess today. It was chartered in 1602 for trading in Asia and became the first publicly traded company.

“In the 17th century, large-scale trading in shares and derivatives was unique to Amsterdam,” Lodewijk Petram wrote in his book “The World’s First Stock Exchange.”

In the last century, Amsterdam became the first European city to establish an options market, something financiers use to explain the early development of Dutch HFT firms. The venue began trading derivatives in April 1978.

Optie Verhandelaar

Take Optiver, whose name stands for optie verhandelaar, or “options” and “trader.” It started life on the floor of Amsterdam’s European Options Exchange in 1986. Today, it has offices in Chicago, Sydney, Shanghai, Hong Kong and Taiwan, trading listed derivatives, stocks, exchange-traded funds, bonds and currencies.

IMC, which was founded in 1989, trades on more than 100 exchanges and other venues, according to its website. The company is a designated market maker on the New York Stock Exchange. It was set up by two options traders.

Across the Atlantic, CBOE established the first marketplace for trading listed options in 1973. Chicago has since become a hotbed for HFTs such as Jump Trading LLC.

‘Very, Very Active’

“We’ve had a very, very active options market in Amsterdam, with quite large retail involvement as well,” said Gerard Ayodeji, a spokesman and former trader at Flow Traders. “If you look at the electronic trading firms in Amsterdam, pretty much all of them are tied in a way to the old options exchange. In our case, our founders met working at Optiver.”

Morgan Stanley, UBS Group AG and Credit Suisse Group AG are working on Flow Traders’ initial public offering. The share sale could value the company at more than 1 billion euros ($1.1 billion), according to people who asked not to be identified as the details aren’t public. The firm plans to list on Euronext Amsterdam, according to a statement on Thursday.

The firm specializes in exchange-traded products and was founded in 2004 by Roger Hodenius and Jan van Kuijk.

Flow Traders has operated globally since 2010 and has about 160 employees in Amsterdam, 30 in Singapore, 30 in New York City and 20 in Romania. The company specializes in assets like ETFs and exchange-traded notes.

‘Under The Hood’

Investors got one of their first peeks under the hood of an HFT when Virtu Financial Inc. filed to go public last year. Investors now know how much a company with 148 employees can make by trading assets very quickly: last year Virtu’s net trading income was $685 million.

HFT is a catch-all term that’s often disliked by the industry because there are many styles and methods of speedy trading. Virtu, for example, describes itself as an electronic trading firm and market maker. European officials, meanwhile, have struggled to agree on a definition for what counts as HFT.

And it’s worth noting that it’s not just robots. While a visit to Optiver’s trading room leads through a hallway of servers and glass that changes color according to the day’s trading activity, it still employs some 225 traders worldwide and 95 in its Amsterdam offices.

Many of these companies use their own capital, a practice known as proprietary trading. Unlike most funds, they aren’t trading on behalf of external customers. Their computerized strategies can be the secret sauce that drives profitability. Added together, HFTs have little reason to seek publicity and some are highly secretive, which helps fuel suspicions about them.

Rigging Markets

Controversy about HFT reached fever pitch last year with the publication of Michael Lewis’s “Flash Boys,” a book that argued the U.S. stock market was rigged.

A study in March by New York-based brokerage Convergex Group LLC shows that worries about HFTs in the U.S., at least, have ebbed.

While filing to go public obliges Flow Traders to disclose more financial information, some details were already available from the Dutch Chamber of Commerce’s website. Flow Traders posted a net profit of 53.6 million euros in 2013, while Optiver made 191 million euros and IMC 169 million euros. Flow Traders made 67.9 million euros in 2014, according to Thursday’s statement.

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