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Going with the flow

Published in Automated Trader Magazine Issue 38 Autumn 2015

Flow Traders is one of the Netherlands' major success stories, with a valuation of some Eur1.5 billion after its IPO earlier this year. Automated Trader talks to co-CEOs Dennis Dijkstra and Sjoerd Rietberg about being a global ETP liquidity provider with a Dutch home base, and life since the IPO.

Dennis Dijkstra, Co-CEO, Flow Traders
Dennis Dijkstra, Co-CEO, Flow Traders

Automated Trader: How would you describe the Netherlands' trading environment?

Dennis Dijkstra: A big theme is transparency, lit markets and a fair, level playing field. I think that's also where the Dutch culture plays in.

Where we see transparency being a big game changer (is in) the regulators pushing dark trading into lit trading, more electronic trading, more trading on exchanges where people have an equal chance of engaging with order flow and providing liquidity.

Equity markets have historically been one of the markets where this has been the case, and FX, but also other new markets, like bond or currency markets, will move towards that direction. So I think the Netherlands, and Europe, is important and has been playing a leading role.

AT: From the Netherlands you've spread quite far globally, how are your Asian and US operations?

DD: The biggest innovation in the financial services industry is probably passive investing and exchange-traded funds. We have grown with the success of this low cost, transparent and very liquid underlying market.

In the late 90s, it started in Canada and the US, in the early 2000s Europeans adopted ETPs and we've been founded over 10 years ago after the first listing of an ETP here in Europe. We support issuers but also investors on a global scale across asset classes, across geographies. You need access to all the underlying markets, and we are present in 33 countries now and close to 100 exchanges or liquidity pools.

Sjoerd Rietberg: The opportunity really was the launch of ETPs in Europe and knowing they were a huge success in the US.

It was really about capturing the growth of ETPs in Europe initially, and later on expansion focused more on Asia because the US is already a highly liquid lit market.

In 2007, The Singapore office was founded to provide liquidity in the Asian region and to facilitate liquidity providing in Asian exposed ETPs in Europe. At the same time of course, we expected these markets to boom and grow with China and India market places. It took a few years longer than initially anticipated but we see huge growth now.

AT: Can you define ETP?

SR: We use it as a container term to capture ETFs (exchange traded funds), which is the biggest chunk, and we have ETCs (exchange traded commodities) and ETNs (exchange traded notes). But 85% of ETPs is an ETF.

Dennis Dijkstra (L) and Sjoerd Rietberg (R) on the trading floor

AT: What should people know about your global operations?

SR: We provide liquidity in over 4,500 ETP listings worldwide. Roughly there are 12,000 ETPs in total. Last year we traded over €500 billion in ETPs, we do way more than 100,000 transactions on an average trading day.

We are always providing liquidity in a market neutral way. We have no directional opinion at all, completely agnostic to market movements. It's about making sure that we can manage our exposures in the most effective way, so holding periods can be a day, or an hour, whatever, but our market exposure will be continuously zero. The moment we do a trade we will instantaneously hedge ourselves.

In 2014, there's roughly $12 trillion ETPs value traded in a year, in Europe it's $800 billion, and in Asia it is some number roughly like that. In the Asian region, you see well over 200% growth in the value traded in ETPs.

AT: Your H1 figures show a big jump in trading income year to year (140% to €147.4 million), but a drop quarter to quarter (down 8% to €70.5 million) - what's going on behind those figures?

DD: It's always difficult to carve out what is normal market activity, and what value traded is caused by volatility. The general public has difficulty understanding what happens when volatility occurs. For us, it is business as usual as a liquidity provider, but the benefit for us is that trading activities increase by multiple times, but also that margins on exchange tend to widen. We benefit from revenue capture.

Liquidity providing in ETPs is a market neutral strategy because there is a direct relationship with the underlying assets or exposures, so we have the ability to hedge ourselves immediately with the same risk profile products.

AT: What have been some of your biggest surprises?

DD: Ha! We don't like surprises.

AT: How about in the positive sense?

DD: We have been on the road many weeks before the IPO. What surprised me was that we got a lot of positive feedback. We expected there would be more of a negative view or stance, especially from more long-only investors towards electronic liquidity providing and firms like ours.

We explain that this is not about stock picking, this is about investing in a low cost, passive (index) investing, but also it's about electronic trading and about the state of the financial and equity markets nowadays.

Investors have a lot of uncertainties about how trading works, what happens during volatility.

AT: Is that because of negative press around HFT?

DD: When the markets were volatile (on 24 August), again people have questions - what happened in the stock markets globally? But now other public firms, like Virtu Financial, and the exchanges have a voice and a face.

We need to increase the knowledge of the current state of the electronic markets because we really need investors to have faith in financial markets, and the electronic markets.

AT: And unpleasant surprises?

DD: We had a situation where our Singapore office was closed in 2013 due to the haze - huge pollution in Indonesia. We moved the whole Singapore office to Amsterdam. This was done over the course of one weekend. Relocated all the traders, risk management and technology staff, the pollution was dozens of times the acceptable levels. That was really unpleasant but we did not want our staff to be in such circumstances. But we have always been able to set up an organisation and infrastructure, and remain redundant in all market circumstances.

It really is more about redundancies, it is more about always being able to be in control of your operations.

Sjoerd Rietberg, Co-CEO, Flow Traders

Sjoerd Rietberg, Co-CEO, Flow Traders

AT: What can you tell me about the technology underpinning your strategies?

SR: We provide liquidity in all these different asset classes, so we are connected to all these different exchanges to ensure that we have access to all these underlying prices.

These ETP products are well suited for arbitrage, which means that you can continuously reflect the exact value of this product based on the relationship with the underlying products. It is fierce competition, you cannot afford to be slow and indeed you need to have proper infrastructure in place. In terms of a global network - over a thousand machines, running in over 40 data centres worldwide and being able to send millions of orders on a normal trading day.

Also, you may have seen that we have our own radio frequency network in Europe. There are a lot of technological necessities for us to provide liquidity in ETPs and keep tight spreads.

At the same time, we also provide liquidity off exchange, so we have an institutional trading team of 12, with a lot of relationships with the pension funds and institutional investors. They do approach us for prices off screen.

There is a growing trend of volume off exchange on RFQ platforms (Tradeweb), so there are hybrid markets that have been growing very rapidly especially in the last two years.

AT: And the growth in off exchange, what would you put that down to?

SR: In Europe, it is estimated that over 2/3 of volume traded in ETPs is traded off exchange, for us still a majority of trading we do is on exchange, so by definition we can grow our liquidity providing business off exchange. That part of the pie is even bigger.

ETPs as an investment product is becoming more and more interesting, with more and more trading on and off exchange. With MiFID II this off-exchange trading flow will become more visible because then all off exchange trading will be printed and will become visible on exchange.

AT: The technology aspect is sometimes described as an arms race. Do you feel that pressure to always be the fastest?

SR: There are two answers to that. For one, it's really the combination of pricing, technology and risk management that defines our success. Speed is not that important. So, if I am providing liquidity in an emerging market ETP in a European afternoon, we need to understand how this product works, what is the underlying asset exactly? If I can get a really fast connection to Taiwan, but the market is closed anyway and there's no trading, then who cares?

But we also provide liquidity in relatively straightforward bluechip- or commodity ETPs, and that's about how you can optimally, in the most efficient way, get price information from the underlying market place, to the place where you are providing liquidity. So there we do encounter that arms race to put it like that. The necessity for us to manage our risk in an efficient way, it means we need to be fast.

DD: The well-established global liquidity providers, all of them are regulated. We need to deal with six regulators and with the regulations of 94 liquidity venues. Speed, or latency, is important but it's not the most important.

We are focused more on having a reliable system being able to be in the markets all the time. We must be fully redundant. We have never seen our systems run at more than 5% of our global infrastructure's capacity because we need to be able to have global market data available across the globe to all our offices, but also the ability to hedge ourselves. In addition, we have to deal with all these global requirements on the software systems we have been building. Safe trading is more important than fast trading.

AT: Which technologies are you leaning towards? When you talk about software systems, what can you tell me about that?

SR: For the more straightforward business solutions, Java software development will be fine, C++ is more deterministic so it's easier to exactly measure where can you improve or increase your speed. We use multiple technologies, and there we are a bit agnostic.

Does it suit our needs? Can we fit it into our current infrastructure? And does it add value for us? If so, then we can use it.

We build the core and the most important applications ourselves, and that can be hardware accelerated, or in C++, or Java, or any code. But the core and most important parts are proprietary in-house built.

AT: How is life since the IPO? Any adjustments?

SR: There's more attention from the outside world, from media, even from regulators. From our perspective, it's back to business.

DD: It almost feels like we are becoming visible to the public. But that has its benefits, like all trading should be.

The industry has changed so much and it's more about technology. We look and feel more like an internet start-up, with an informal dress code, it's very low profile, it almost feels like Silicon Valley, but finance.

If I look at how much difficulty we have in attracting quality talent, especially in the technology area, people and talent should understand that this is an exciting innovative changing industry.


Dennis Dijkstra

Joined as CFO in 2009 and appointed co-CEO in January 2014, focusing on finance, risk management, mid-office, compliance, legal and tax affairs. Prior to joining Flow Traders in 2009 Dennis held positions at Arthur Andersen, Faxtor Securities, NIBC and Sparck. Also a supervisory director of ThinkCapital Holding, a Dutch ETF issuer in which Flow Traders holds a 24% strategic passive minority interest, and he serves as a board member (treasurer) of APT, the Association of Proprietary Traders in the Netherlands.

Sjoerd Rietberg

Joined 2005 as a senior trader, named head of trading in 2009 and COO in 2010. Appointed co-CEO in January 2014, focusing on trading operations, trading strategy, technology and software development. Previously held a trading position at Newtrade Derivatives.