Trading €1009 billion a year

We had the opportunity to interview Menko ten Cate, who has been working as a trader at Flow Traders for three and a half years now. Flow Traders is one of the largest liquidity providers in the Exchange Traded Products (ETP) markets. They are continuously quoting 7900 exchange traded products. The total value traded by Flow Traders last year was €1009 billion. Menko works in the Amsterdam office and was able to clear a bit of his busy schedule to answer some of our questions.

What does Flow Traders do exactly?
We are a leading global technology-enabled liquidity provider, specialized in Exchange Traded Products (ETPs). Flow Traders is at the intersection of finance, cutting-edge technology and scientific research. We are able to grow our organization further, thereby ensuring that our trading desks in Europe, the Americas and Asia provide liquidity across all major exchanges, globally, 24 hours a day. Financial markets have rapidly shifted from trading in the pit to algorithmic trading, and our business model has made us an entrepreneurial and competitive firm in the FinTech space. We use our principal technology platform to quote bid and ask prices in thousands of ETP listings. We are also active in other asset classes such as bonds, FX, cryptocurrencies and similar financial products. On top of that, we provide liquidity to institutional counterparties off-exchange across all regions! 

Flow Traders is European market leader in ETPs. If you invest in an ETP of the S&P500 index, you are indirectly a small shareholder in all of those 500 companies. Your investment is tracking the S&P500 index. This is where Flow Traders comes in - if we value a certain ETP at €100, we might go for a bid price of €99,98 and an ask price of €100,02. This way, we try to make a profit from the difference of these two prices. Note that unlike a hedge fund, a market maker does not have a vision whether the price of some product will go up or down. 

Since the market making world is very competitive, we are continually working on improving our pricing algorithms and our ways to hedge risks to make it possible to deliver tighter quotes. Aside from ETPs, Flow Traders also offers quotes for other products like stocks, bonds, currencies, cryptocurrencies, futures and options - we are a market maker in all financial products you can imagine.

Lastly, we do offer exchanges. In this case, a large pension fund might for instance want a two-way quote for €100 millions worth of some ETP. It is important that we can deliver this quote quickly, since the price of the ETP might go up or down and our competitors will try to undercut us. The pension fund will of course go for the lowest offer, so it is certainly very competitive.

Our market share is 37% and we are Europe’s leaders in the ETP market.

What’s really impressive about Flow Traders, is that their yearly trade volume is around one trillion, or almost three billion per day. Is this an indication of the vast amounts of quick trades?
Our market share is 37% and we are Europe’s leaders in the ETP market. In some sectors we trade 20-40% of the ETP volume. The currency market is the largest; so large that trading a billion in currencies each day does not even make you a very significant party. Add hedging to this, and you’ll easily reach the volumes mentioned in the question.

We try to keep our bid ask spread smaller than those of the competition. We are much concerned with speed, but not necessarily because we want to be faster than others. If we put in a quote, and the market moves in New York, and we don't allow our quote to move in time, a competitor with a faster connection can sell at our bid or buy at our offer. That's why we need fast connections to be able to move our quotes quickly when the market moves.

All these large numbers, but how does Flow Traders contribute to society?
As market makers, we make a profit based on our pricing. Pension funds and asset managers can benefit from this, since competition leads to tighter quotes. This way, it becomes cheaper for them to change to certain financial products, like Socially Responsible ETPs. These ETPs track an index with the “wrong” companies, like companies in the weapons or tobacco industry, filtered out. Without Flow Traders and its competitors, the bid-ask spread would be larger which would mean higher costs for all investors. We contribute to the efficiency of financial markets.

What does your working day look like?
We actually quote financial products for the entire world, but are divided into time zones: we have large trading offices in Amsterdam, New York, and Hong Kong, and other offices for sales and development. The European stock exchanges are quoted from Amsterdam. America from New York and the Asian stock markets from Hong Kong. That way we only have to be present during European trading hours (in Amsterdam). I usually get to the office at 7:30 in the morning. We have breakfast at the office. Then in the morning we go through all of our theoretical valuations of products, and look at financial news in the world, and make sure we get our pricing right before 09:00 when the stock exchanges open.

After that, we are constantly monitoring what kind of trades our trading systems are doing. So if there are large OTCs, so if a pension fund suddenly wants to buy or sell 100 million of something, we will also manually look at what kind of quote we want to give. We are also working a lot on improving our algorithms so that we can quote even more efficiently and tighter and hedge even cheaper and better. Then around 17:30 the European stock exchanges close, and we check whether everything went well and what positions we still have. Around 18:30-19:00 we go home.

I think these hours are manageable, but they are intensive because you have to keep a close eye on everything.

What makes a trader “good”?
It’s very important to be able to think analytically well, which luckily is a characteristic of most econometrics students. Aside from this, you have to be sharp throughout the day to be able to notice it quickly when something is wrong. If you price a product wrongly, our competitors can profit from this greatly. Most essentially, it helps if you are interested in financial markets and if you enjoy the “game” of trading. During my studies, I was not really trading already, but the interest was certainly there. Trading is most profitable in large amounts, which you simply do not have available as a student! So it is not a necessity to have trading experience before applying at Flow Traders.

Growing in the company
What kinds of different positions are there and how can you grow at Flow Traders?
I am a trader and therefore I work with our electronic trading system and we set the parameters of our systems and how we trade. We also have developers who develop the software that is used for trading and then we have sales traders who do contact with OTC counterparties. We have Risk management, who keep track of all risks, we have a mid-office that takes care of all administrative matters and ensures that our traders also settle.

We have quants, which help traders with mathematical models: that's a lot of econometrics-like work. Those are actually the main positions.

When you start, you are in a kind of traineeship for the first few months and you get lessons in how our systems work and how trading works. In addition, you will be explained the theory and will act in a simulation environment to learn it. After a few months you start working as a junior trader at a desk (our trading is divided into desks and each desk has a series of products linked to it so that we do not compete internally), and at each desk there are 2 to 4 traders and those manage a 'book' together that results in a profit or loss, and when you leave that class you become a junior at one of those desks and you learn how to work at the desk so that you can run it all yourself. Later you can switch to another desk or become head-of-desk. You can also grow further or move to another office, New York or Hong Kong. You can also become head-of-trader, i.e. the managers of the entire trading floor. Many people move on to other positions or work for another company.

Can you also trade for your own profit?
We have very strict rules for this so that we are only allowed to trade at certain times (we are not allowed to trade for our own portfolios during working hours anyway), but we do not have any extra knowledge about the ETPs, so in that sense there are no possible conflicts with regard to insider trading.

Market making is a very competitive world, but internally it is all about teamwork and our desire to win together.

Differences between Flow Traders and its competitors
We are comparable with competitors in terms of our business model, but what I especially like about Flow Traders is that there is a lot of collaboration. What you see with other market makers is that they work more or less in closed cockpits with people sitting alone with computer screens surrounding them. If you look at Flow Traders’ trading floor, we are divided into long rows so that people collaborate much more and look at what can be improved in terms of strategies. 

In addition to this, our bonus pool is shared. Therefore, it is not the case that you only get a part of the profit that you are responsible for yourself, but the bonus pool is filled by all employees instead. This gives you much more motivation to help each other and give each other tips. Market making is a very competitive world, but internally it is all about teamwork and our desire to win together. This creates a very nice working atmosphere in my opinion.

What does the application process at Flow Traders look like?
I participated in a two-day business course a few years ago, which was a great experience. We tagged along at the office to be able to see what a trader does. Afterwards, there was the opportunity to talk with traders about their jobs during a fun drink. To participate in the business course, I did have to apply with a letter of motivation and my CV. After the business course I was invited for an interview. This normally concerns an interview about your motivation and also some brain teasers. Next, there was a case, which was more business-focussed. That more or less describes the application procedure. 

I have been working at Flow Traders for three and a half years now and I started right after graduating. The first few months of my career I spent learning everything about the systems here, which is mostly the case with new traders.