To limit losses, pension funds and other investors have to operate quickly on the stock exchange. Often another investor is not immediately available to trade, but one can always turn to an exchange trading firm to buy or sell shares or other financial instruments (warehousing). Trading firms are constantly present in the market, also when volatility peaks and risks have increased. This smooths out falling prices and guarantees the continuity of trading. Also, trading firm’s technology is helping to reduce spreads/trading costs, already by 50% over the past 15 years.

Amsterdam is a global centre for proprietary trading, where many Anglo-Saxon firms have settled since Brexit and with a history of more than 400 years of market making. Based in Amsterdam, trading firms ensure continuous trading flows (liquidity) on stock exchanges around the world, by issuing prices in all circumstances and by continuously buying and selling financial instruments in larger, smaller and sustainable funds. Duties and responsibilities are laid down in law.

Investors, such as pension funds, thus have the certainty that there is always a counterparty to trade with, because another investor is often not directly available. This allows investors to make immediate investment decisions and control risk more accurately. To guarantee liquidity, trading firms hold short-term stock of financial instruments (warehousing). By continuous presence in the market and willingness to buy if others want to sell or to sell if others want to buy, trading firms also help to smooth out peaks and troughs (volatility) on the stock markets.

“Proprietary trading firms ensure liquidity and less volatile markets: thanks to these firms, there is always a price at which investors can buy or sell (market making).”
Wopke Hoekstra, Minister van Financiën (2020)

Exchanges provide businesses and governments access to capital and facilitate investors to build wealth and spread risk. This is of huge importance for the economy at large. A thriving stock exchange also prevents excessive dependence on banks and provides competitive financing for businesses. The activities of trading firms ensure adequate functioning of exchanges.

“A crucial role is played by market makers and liquidity providers, who are continuously present in the market. They fulfill an important function because they ensure that investors always have a counterparty to trade with. Under these turbulent market conditions, this is more than ever necessary for markets to function properly. ”
Simone Huis in ’t Veld, CEO Amsterdamse beurs Euronext (2020)

Trading firms take the risk of buying a financial instrument to sell it at a slightly higher price, like a wholesaler does. They do not speculate on a price drop or rise. The International Organization of Securities Commissions IOSCO concludes that this type liquidity provision plays a vital role in price discovery and is a crucial element of fair and efficient markets. And according to regulator AFM, trading firms are important for the national infrastructure surrounding the capital markets. During a crisis, trading firms help absorb shocks, the Bank for International Settlements (2016) ascertained. When volatility increased due to the Corona crisis, these efforts, were particularly important for the functioning of the market.

“Liquidity dries up quickly when volatility peaks. Proprietary trading firms remain in the markets in which they operate, such as the equity and ETF markets, during volatile market conditions, thereby contributing to liquidity. ”
Autoriteit Financiële Markten, Implicaties van de coronacrisis voor de financiële stabiliteit (2020)

Through data-driven technology and competition trading firms have improved price formation and contributed to the reduction of trade costs by more than 50% over the past 15 years (Research by Vrije Universiteit 2016), which positive effects on wealth and pension building.

“Competition between market makers ensures that differences between buying and selling prices on the stock exchange are minimized. This results in investors having to pay less when buying securities and getting a higher price when selling. This allows banks, insurance companies and pension funds to provide services at a lower cost. It is very important for pension funds (APG) that they can deliver part of their investment needs immediately and at low costs. They need counterparties like market makers to do this.”
Femke Halsema, Burgemeester van Amsterdam, letter to the Municipal Council (2018)

Trading firms must meet strict requirements regarding i.a. capital and market integrity, are supervised by the AFM and DNB, trade exclusively with their own money and at their own risk, do not manage the assets of others and have no clients. Firms have a short cycle risk and apply strict risk management. Transactions are cleared by a solid clearing system.

This infographic provides an overview of the proprietary trading industry in the Netherlands and this interview gives insight into liquidity provision during the first weeks of the Corona crisis.