In a sign of HFT's encroaching dominance in the market, and the changing equity market liquidity provisioning landscape, Dutch specialist firm Van der Moolen earlier filed for protection from creditors, the European equivalent of a chapter 11 filing. As expected, the monopoly of the "very few" is starting to eat the peripheral players. As the AP reports:
Van der Moolen, once one of the larger "specialists" on the NYSE, ran into trouble this decade as electronic trading platforms took over their role.
And for those unfamiliar with the specialist role, here is all you need to know:
Specialists provide liquidity and act as brokers for stocks, bonds and other securities. Van der Moolen sold its loss-making specialist operations in the U.S. to Lehman Brothers for $0 in December 2007.
The company was founded on July 1, 1892, by F.J. van der Moolen as a stockbroker, according to the Amsterdam Stock Exchange. It became the No. 4 market maker on the New York Stock Exchange in 2001 after buying specialists including Cohen, Duffy, McGowan & Co. and Scavone, McKenna, Cloud & Co.
Or at least they did until the rampaging advent of HFT and, in more recent days, the creation of such artificial constructs as the SLP.
As to the reason of the filing, Bloomberg had this to say:
Van der Moolen took the step because of slumping revenue, costs related to moving offices, and 30 million euros ($42.6 million) of treasury share purchases in 2008 that had a “too severe” impact on its reserves. The company reported today a first-half loss 8.7 million euros and a 73 percent plunge in sales from a year earlier.
Whether last week's odd market dislocation had anything to do with Van der Moolen's implosion is unknown. One thing is certain: Van der Moolen is merely the first. Liquidity providers are starting to really feel the pain from "alternative liquidity vendors" - expect many more news on comparable small to mid-sized operations, whether in the traditional specialist context or the more modern, HFT M/N quant reincarnation. One merely needs to look at the BGI's market neutral sorry performance YTD, or just look at the HSKAX, which at last check was back to 2006 levels (while collecting 2/20 for the past 3 years mind you), to see what is really going on in the liquidity provisioning arena. In the meantime the ultimate beneficiary, Goldman Sachs, is sitting pretty, aware that there is no chance of it ever being the target of an anti-trust DOJ campaign for having become the liquidity provisioning monopolist (and benefiting quite prettily from this). Or is there?