Volatility winners: Virtu Financial and Flow Traders
The sudden upsurge in volatility has been a boon for the market’s intermediaries. For high-frequency traders the last 10 days have been an oasis in the desert.
Most of these companies, such as DRW Holdings, Citadel Securities and Two Sigma, account for the majority of volume on global equities, futures and foreign exchange markets.
They use their own money to trade and quote bid and offer prices, and earn profits by using computer algorithms to exploit differences in the spread between bid and ask prices, ending the trading day with minimal open positions.
After a boom during the financial crisis years, the industry has been hard hit in recent years by low volatility, rising technology costs and a regulatory crackdown on behaviour and practices in electronic trading. Many of the smaller market competitors have been sold to rivals.
Most are small and private but two, the US’s Virtu Financial, and Flow Traders of the Netherlands, are listed on their home markets, with market capitalisations of $5bn and €1.4bn respectively. Shares in both have surged by more than a quarter in the last seven days on investors’ hopes that higher market volatility will lead to improved corporate profits.
“The environment where you have a lot of price changes during the day is the ideal environment for a market maker,” said Doug Cifu, chief executive of Virtu.
For him last week’s blow-up in products related to the performance of the Vix volatility index was not an issue. “We make markets in 2,000-ish exchange-traded products around the world and if a small handful of them are having issues, it really has no impact at all on our performance going forward.”
But investors should be wary; there have been notable spikes in volumes and volatility in the past and it has not translated into sustained earnings. Whether this is cyclical or temporary remains to be seen.