Algorithmic trading firm Flow Traders has racked up 31 months without a single day of losses, making the Dutch company one of the big winners from the spread of exchange-traded funds (ETFs).
Flow Traders is listed the leading global technology-enabled liquidity provider, specializing in exchange traded products (ETPs). Flow Traders provides liquidity in ETP markets 24 hours a day while seeking to stay market neutral at all times and without having directional opinions. While Flow Traders does not have any clients, they enable investors to buy and sell ETPs efficiently by quoting bid and ask prices. Thereby Flow Traders, seeks to earn small amounts of money on large numbers of individual transactions based on the differences between our ETP prices and the prices of the underlying or related instruments. They provide liquidity in over 4,000 ETP listings across the globe, tracking all underlying asset classes, including equities, fixed income, commodities and currencies with access to over 90 trading venues in 36 countries. The company has been named Europe’s number one Trading House for ETFs in the EFT Risk European Rankings over three consecutive years – 2013, 2014 and 2015.
Flow Traders has an algorithm specialized in so called hard-to-price ETFs. They are so successful in this kind of arbitrage trading that they have made a profit every trading day for the past 31 months!
“Throughout 2016 our trading infrastructure operated as expected and the trading team showed great discipline during events like Brexit and the U.S. elections,” said Flow’s co-Chief Executive Officer Sjoerd Rietberg.
An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price change throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors. It even pays you dividends!
But how can you make money with buying and selling ETFs within seconds? For example, let’s take the AEX index. If you have bought an ETF tracking the AEX index for a total of $1,000, you theoretically own all stocks which are listed at the AEX index. If the AEX drops, let’s say, fifty basis points (bps), the value of the ETF should also decrease by fifty bps. If this is not the case, an arbitrage opportunity appears. Namely, if the ETF is worth $1,002, but the AEX is increased by fifty bps, your ‘normal’ portfolio which represents the AEX is worth $1,005. So, if you buy the ETF at $1,002 and you sell the underlying stocks (the exact same stocks as you would have if you had bought the ‘normal’ portfolio), you will have a profit of $3.
This is exactly what Flow Traders is doing so effectively by using special developed algorithms. These algorithms pick up signals from the markets for potential arbitrage opportunities. When the spread between the ETF and the underlying stocks is effectively, the algorithm places a buy order and sells the underlying stocks in less than a second. This technique is also called High Frequency Trading (HTF). The more volatile a market is, the more profit a HFT boutique makes.
However, due to subdued volatility in the first three quarters of the year, net trading income from the European ETF market, where Flow is the biggest trader, dropped 14 percent in 2016 to 167 million dollars. Income from the U.S. market jumped 32 percent to 68 million euros as Flow started building a presence in the off-exchange ETF market where the biggest deals take place.
Want to know more about Flow Traders’ CEO or HFT-trading itself? Visit this page to read an interview with Co-CEO Dennis Dijkstra.