Flow Traders NV (AMS:FLOW), one of Europe’s most enigmatic and successful algorithmic trading firms, has had one of the most dominating streaks in recent memory. Much of Flow Traders’ success can be attributed to its use of a pricier and more mathematically intensive approach that effectively eliminates as much risk as possible.
The result is nearly three straight years without any daily losses, having traded nearly $713.4 billion (€640 billion) in exchange-traded-funds (ETFs) in 2016 alone. Despite the group’s collective trading staff and associates numbering less than 150, Flow Traders’ volumes exceed leading banks on Wall Street, citing data from a Bloomberg report.
The speed-trading group provides liquidity in exchange traded products (ETPs) across Europe, the Americas, and Asia. It is run by Co-CEOs Dennis Dijkstra and Sjoerd Rietberg, and despite its widespread success in the ETF space, is reportedly eyeing a move into currency trading.
Lean and Mean
Relatively speaking, Flow Traders effectively handles roughly 33 percent of all ETF trades in Europe, a colossal proportion for such a small staff, notably when weighed against the collective might of trading units at other investment banks. Despite its proven success and lofty volumes, the group does face an existential crisis in the form of internalized growth, as indicated by a stagnant share price.
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After debuting its initial public offering (IPO) in July 2015, the group’s share price has been unable to secure any level of growth. Since first being publicly traded, the company’s share prices (AMS:FLOW) have fallen over -28.0 percent in under two years, marred by a -41.0 percent loss in profits during the first quarter of 2017. Faced with these constraints, the group is looking to allay the issue of tranquil markets and low profit margins by making a new splash into another asset class.
Furthermore, the group has had to grapple with a finite pool of income available to algo trading firms that is essentially shrinking as competition has grown in recent years from established trading companies looking to expand into new asset classes. According to Mr. Rietberg and Mr. Dijkstra, a move into the currency trading space may be just the panacea the company needs, which it feels is a natural evolution of its business.
Flow Traders is hoping that high-speed FX traders will be able to offer better prices than banks, which traditionally adjusts their bids and offers based on their customers’ creditworthiness as well as the amount of business they do with the lender. The group plans to move into FX trading by year’s end, though has already taken steps to get this transformation under way.
This has culminated in strategic hires of FX traders from an undisclosed Wall Street bank to help shore up its knowledge and understanding of the asset class itself. The ultimate goal will be to make prices, a step that would see it become a market maker for currencies. In the interim, the group has relied on taking FX prices from other market makers to hedge its ETF positions.
The strategy is not without risk, something Flow Traders has gone to great lengths and costs to account for. The group’s unique approach to algo trading could help it make inroads into other financial markets. However, the gambit could ultimately backfire as its rivals pilfer its core ETF business.