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Meet Martin Polak, Chief Operating Officer at All Options

by Adam Powell
Can you explain the roles of the main participants in modern capital markets – the market makers, the buy side and the banks 
Historically, banks have had quite a big role in financial markets. However, over the last decade you see that independent market makers have increasingly provided liquidity, even more than banks. This is particularly visible in turbulent markets: independent market makers have proved to stay in the market when liquidity is needed most. Great example was the Covid 19 market turbulence, where market makers ensured liquidity and price formation even when it got a bit wild. 

We genuinely cater to the needs of end-investors (or buy-side), by making sure they can always trade at a fair price, in liquid markets. That benefits retail investors, but also institutional investors, as well as banks. We are simply the oil in the machine, always showing prices. Banks have tended to withdraw from market making over the last decade, although they still represent a lot of transaction volume from their clients.  

We simply provide liquidity for end users. So regardless of who wants to trade: investors, or banks on behalf of clients, we take care of the plumbing, together with the exchanges. Amarket maker we ensure that there can be trading at all times, and that the price on the screen is up-to-date and competitive. 

We genuinely cater to the needs of end-investors (or buy-side), by making sure they can always trade at a fair price, in liquid markets.

How has liquidity traditionally flowed and how has electronic trading and market making changed that liquidity flow? 

Traditionally banks and asset managers used to be key sources of liquidity. But sometimes they struggle to keep up with price formationMarket makers have always been present, although the balance has shifted to independent market makers with banks concentrating on transaction volumes for their clients. 
Market makers make prices tighter, leading to more liquidity and cheaper execution for anyone who wants to trade. Over the last 2 decades, the spread (difference between bid and ask prices) has decreased massively, making trading easier and cheaper for everyone. This is a direct result of innovation and technology, in which we continuously invest. This allows us to trade competitively, ultimately benefiting end-investors because prices are better than ever before. 

The other difference we make in modern markets is to make sure that we are there at the moment where there is no liquidity. So, during the Coronavirus crisis for example, market makers kept quoting prices so that crashes are avoided: investors (retail and institutional) could still rely on accurate price formation, which dampens sell-offs and reduces uncertainty. There’s always someone who buys when someone wants to sell. So I think we prevent market crashes and help markets be more stable, even in turbulent circumstances.

Markets, and market makers, are incredibly competitive. There are always multiple market makers, not just a couple of big ones, but a wide variety of them each with different strategies. So we really compete on price and we really make sure that there’s a liquid market at all times. Diversity of market participants is extremely important. That is steadily improving, and we welcome initiatives like speed bumps which allows as many market makers as possible in the market. This helps a lot with less liquid products that are harder to quote. There’s a wider variety of participants in the market, and this increases market quality for retail and institutional investors alike. Market structure is much more diverse and resilient than ever before.

How are market makers, influencing the future development of markets do you think? 

You want diversity and competition in financial markets, and market makers that have different strategies. Most participants in modern markets use algorithmic technologies – from your household broker to pension funds, and we do too. Because we have a natural incentive to price better, we keep innovating. That benefits the end-investor because their pricing gets better, because we, and other institutions, are competing fiercely.

Market makers are in the business of providing pricing on the exchange, but they do so together with other sources of liquidity, like banks, brokers and asset managers. Exactly because there are more and more innovative market participants, markets become more and more competitive. Combined with circuit breakers (halting the market when price formation is no longer accurate), markets have become much more resilient and liquid than in the past, even under the most difficult circumstances. The recent Covid turbulence has shown that markets are operating as they should and that price formation is continuous and correct.   

So how do we influence the future developmentWhat we try to doand our competitors as well, is to try and make sure that the market becomes tighter and tighter, that everything goes through the electronic book. We are fierce proponents of trading everything on lit markets, i.e. on open and competitive exchanges, where supply and demand meet. What we see as problematic is that increasing trading volume, particularly retail trades, are siphoned off liquid markets into ‘aggregators’, affiliated platforms and SIs, away from exchanges 

This simply means that increasing trade volume is no longer contributing to price formation, deteriorating market quality. We are committed to keep exchanges the central market place for all end-investors, because it ensures them a central market place where they achieve the most competitive and transparent prices imaginable: because of fierce competition among all market participants, including market makers. 

Ideally, everything is traded on one single market as that would actually be on just one central exchange for all supply and demand. But this is not an easy thing to achieve because there are a lot of forces who’d rather want to execute trades through their own affiliates, or investment banks and SIsWe see payment for order flow and executing retail orders at reference prices, without genuine supply and demand interaction, as a threat to market quality. That’s why we really believe that full transparency and competition will be there if everything is traded on one key exchange, for each product. 

also think the whole speed game is not something that we should continue to do. Ultimately it only benefits one or two hyper fast participants while stifling competition for all the other participants. Speed bumps and other incentives to end this highly expensive arms race genuinely benefit end-investors. A pointless speed race ultimately costs end-investors real money because competition decreases and trading costs increase to recover the investments in speedThis is something for our industry, as well as exchanges, to reflect about next. 

And how do firms like All Options support broader parts of society through their activities? 
It‘s important to show that that market making has a lot of positive side effects for society, and that’s just us, doing our job. We’re in the business of providing liquidity, competing in markets, being innovative, and improving the market. Ultimately, society benefits because of that, and that is the single most important factor in everything we do 
I will say that we make sure that people can invest in the cheapest way possible, with execution certainty. We believe that if we continue to strive for better markets, a more competitive and innovative market structure, in the end the result will be beneficial for everyone 

So we focus just on that, and keep stressing this with regulators. You don’t want an oligopoly like in the past or an even more fragmented market structure. Eventually, the end-investor pays for increased fragmentation and trade volumes leaking away from central market places. Low-cost or no-cost brokerage sounds nice, but end-investors pay the price in wider spreads and less competition (albeit this is much less visible to retail investors than paying a couple of euros in trading fees on-exchange).

We believe that if we continue to strive for better markets, a more competitive and innovative market structure, in the end the result will be beneficial for everyone.

Without market makers, how would the way capital markets operate change, and what would be the impact?  
Market makers, innovation and competition ensure tight price formation. It’s the multitude of market participants that make markets better. Market makers are best placed to engage in innovation and competition, because it’s our bread and butter. Without independent market makers, like the ‘specialists’ or handful of brokers we used to have on exchanges, there is no innate incentive to price tightly, leaving money on the table that is pocketed by a small number of exchange members. That’s how markets ran until the late 1990s.  
In an ideal world where you have one market, where everything is traded transparently and deeply competitivelyand everyone can just find each other when they want to trade. Then you would even not need any market makers anymore. But that’s hypothetical. In real life, the competition among market participants, largely fuelled by independent market makers, is the best structure we have at this point.  
So what would happen right now, if there were no market makers? There would be much less trading, poor price formation, poor liquidity, wider spreads and higher transaction costs. The quality of the markets would go down a lot, especially in moments of stress, of which there are more and more nowadays.   
The proof of what we as market makers contribute is highly visible. See how markets have become more and more resilient over time. Trading costs and spreads have decreased by magnitudes over the last 10-15 years. That’s innovation and competition working for the end-investors, even in severely stressed markets. Any other way I think it will be much more expensive to trade. We may not be very visible behind the flickering number on the exchanges, but the benefits to end-investors and society are very real. 

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