Jean-Paul van Oudheusden, the head of business development for retail at BinckBank, is seen as one of the pioneers of the turbo certificates in The Netherlands.

He started his career at ABN Amro, where he was in charge of the Benelux. In 2008, after ABN Amro was acquired by Royal Bank of Scotland (RBS), he moved, with his team, to RBS where he was managing director at the Scottish bank’s markets division, before moving to BinckBank in 2013 where he launched the online broker’s own turbo range earlier this year.

Van Oudheusden was – first at ABN Amro and later at RBS – one of the driving forces behind the introduction of innovative investment products such as the turbos, AEX bonds and various other structured solutions.

Van Oudheusden, dubbed the turbo-godfather in some quarters, spoke to SRP about how the first turbo was created by ABN Amro, the Dutch option market and how BinckBank is trying to make a difference in the market.

First turbos
“ABN Amro created the turbo,” says Van Oudheusden. “We cannot say this about most structured products but the turbo was truly an ABN Amro invention. The product was introduced in several countries, starting in Germany in 2002, and I was responsible for the roll-out in the Benelux.”

At the end of the 90’s the stockmarkets were booming, says Van Oudheusden. Then, in 2000, the Nasdaq bubble burst and the markets entered a downward spiral. Until then many retail investors – at least in The Netherlands – traded in equities but also in options and futures.

“In the aftermath of the Nasdaq bubble many retail investors lost a lot of money with futures. That caused some damage to the instrument future because investors made unlimited losses,” says Van Oudheusden. “Every time the markets were falling investors received a marking call and had to make additional payments. You could ask yourself if they had realised this beforehand.”

At the time, partly due to the situation with the 9/11 attacks in the US, interest rates were very low. “We had a number of clients who said: at this rate saving does not make any sense, we might as well start borrowing money from you,” he says. “Some clients even wanted to try and invest in equities again.”

According to Van Oudheusden, the way a future works, completely linear compared with an option – where you still have to deal with time values and volatility – provided a good exposure to the market, but ABN Amro went a step further to address the low interest rates environment and built in a stop-loss level for the retail market.

Gap risk sits arguably better with a professional institution than with a retail client, says Van Oudheusden.

“That’s what we did at the time and that’s how the turbo was created,” he says. “The first turbos were rolled-out by ABN Amro in Germany, although there they later changed the name to mini future, a name they still use now. I was responsible for the rollout in The Netherlands from 2004, and the re-introduction of the name turbo.”

Options market
According to Van Oudheusden structured products really took off in Germany, because traditionally there was not an option market as opposed to The Netherlands where the European Option Exchange (EOE) had existed since 1978. Dutch investors therefore were much more accustomed to options then their German counterparts.

“With a turbo, if you know the value of the underlying share, it is easy to calculate the value of your turbo,” says Van Oudheusden. “With options you can have a call option and be correct about the rise of the index but if the volatility is high you end up making no profit on your investment.”

The “beauty” of a turbo investment is that it is purely only the direction, says Van Oudheusden. “There are a lot of people who have an idea about the direction of the market, who want to follow a particular trend or want to hook up with the trend, but who do not know when,” he says. “That combination explains the popularity of the turbo.”

Binck turbo
BinckBank launched its own turbo range on 3 July 2014. Since then more than 2,500 have been created and issued. At the launch, the Dutch online broker said it wants to distinguish itself from the competition by offering small spreads and extended opening hours in line with European and American stock exchanges.

“I have always looked at BinckBank as a typical broker and asset manager,” says Van Oudheusden. “We are not a traditional bank in the sense that we do not have a mortgage company or loan company, but in reality, I think, we are the safest bank in The Netherlands.”

Van Oudheusden says that with so many liquid assets BinckBank was in a position to take a “little bit more risk” with its capital, and that the funding component of a turbo is something which fits in perfectly with the bank’s strategy. Until recently, BinckBank distributed mostly products from other banks. The interest component of those products went to the issuing institution.

“We then said, why don’t we make some capital available to provide the financing component of the turbo ourselves?,” says Van Oudheusden. “We do not employ traders, and we do not take market risk at those positions, so we are never the trading counterparty of our customers because we have hired a market maker, UBS, which runs the market risk. We are the issuing company who makes its balance available to finance. We do not have the traditional role that you see in other providers of these products. We are purely in it for the financing component.”

Three months after the first turbos were launched the project seems to be running smoothly. “People do not have to believe me but when I started at BinckBank in June 2013, for me it was certainly not a forgone conclusion that we would succeed within the tight timeframe,” he says. “I think if you look at it from a distance then this was not a small project. To my knowledge we are the first broker in Europe to become the issuer of this type of product.”

Van Oudheusden remains confident of the traction of the new BinckBank range. “We have the largest market share amongst our own clients,” he says. “Moreover, we do not necessarily have the strategy to only do our own product. We have not taken products from other providers off the shelf.”

Spreads
Although BinckBank has not given their own product a preferred position, the broker has created extremely small spreads, according to Van Oudheusden. “We have the smallest spreads in the Dutch market,” he says. “We quote the AEX with a half-cent spread, that’s very important for people who are trading actively in turbos.

These investors earn so much money on the spread advantage that the transaction costs, which are always under pressure at a broker, are much less relevant because you can earn so much extra on the spreads,” he adds

According to Van Oudheusden, the active, experienced investors, are the ones who mainly profit from this format. “If you are a buy and hold investor and you have a turbo with a leverage factor 2 which has been part of your portfolio for maybe three years, then you don’t have a strong reason to switch yet,” he says. “That’s a perfect position to hold, but the really active traders often go in and out and they reap the benefits of the spread advantage.”

The other advantage which is unique, explains Van Oudheusden, is that BinckBank offers turbos between 8.30 am until 10pm, until the US markets closes. “We are the only Dutch party which facilitates the turbo trading hours for the US markets,” he says.

OTC trading
Van Oudheusden points that brokers have a role to play to ensuring that customers make money. “It may sound like a platitude, but the only thing we aim for is satisfied customers,” he says. “What we have seen is that [over] the last four years, there has been little innovation in the Dutch structured products market. This has many reasons. Very few new things which you do see abroad have been implement here. If, for example, you look at the spreads, there was really no pressure on them, there was a status quo in which I felt that the spreads could still be smaller,” he says.

Van Oudheusden says that BinckBank’s innovation came in the form of the spreads and the longer trading hours. “That’s where we needed the Cats platform for,” he says. “They offered our client the best deal.”

Cats is the leading platform in Germany for leverage products and BinckBank has introduced the trading platform to the Dutch market. “They served already French brokers like Boursorama and BourseDirect and is also popular amongst issuers like RBS, Citibank and ING,” he says. “With the smaller spreads active traders really save thousands of euros on their trading costs. From the outside you might not notice this because many people look at transaction costs initially.”

At the moment there are no plans at BinckBank to create other structured products. Capital-protected notes are not an option, according to Van Oudheusden. “In that case we would actually attract funding, and that’s not what we are after,” he says.

“We would not be a natural party in this right now. It does not really matter anyway because if there is demand from our customers for capital-protected notes, we can offer third party products.”

Euronext
While BinckBank is the only Dutch provider of turbos via the Cats platform, competitors such as ABN Amro, ING, Citi, Commerzbank and BNP Paribas have stayed loyal to Euronext.

“Euronext is a fantastic platform,” says Van Oudheusden. “The only downside is that as a monopolist the cost remained very high over the years. In that case it’s only a matter of time before someone introduces something similar.”

“In the segment of turbos, a very large percentage of customers – Euronext talks about 94%, we at Binck think it’s 98% – place their orders directly against the market maker,” he concludes. “This is what makes it possible to look at a bilateral platform such as Cats.”