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From desktop to API - meeting new demand for FX Option platforms
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Regulatory pressures
Alfred Schorno, Managing Partner and head of sales at 360 Trading Networks, says, "What is holding back the growth, as well as further investment in technology by market-makers, are the regulatory discussions around the Dodd-Frank act." However, he says that demand from the buy side for FX options is still very strong and 360T is also getting more demand from the large banks. In fact, the number of FX options executed electronically on 360T has grown by more than 400% over the last year, boosted by the growing number of market makers quoting prices for FX options.
Schorno believes the implications from the regulators are that all derivatives, including FX options, will have to be traded on multi-bank venues, such as Swap Execution Facilities (SEFs) or the European equivalent, Multi-lateral Trading Facility (MTFs). These venues are not to be fully owned by bank market participants.
He says: "This clearly rules out single dealer portals that are 100 per cent owned by one market participant and telephone dealing. When this ruling comes, all FX derivatives will have to be traded electronically and single dealer portals will no longer be allowed to support trading in NDFs and FX options. We expect therefore a a strong boost to this business and we are structuring our business to support this expected shift."
The functionality built by 360T to trade FX options includes structures such as a risk reversals and multi leg option requests. Currently requests are priced manually but going forward Schorno believes that market maker banks will start supporting multi-bank portals with auto pricing instead of investing in their own single bank portals.
Furthermore, he strongly believes that FX options, first generation at least, are sufficiently standardised that they are tradeable electronically, and on a multibank portal.
He says: "When users first start to use a portal, they only use the functionality on the main, standard product. Then the more exotic instruments, such as FX options and NDFs, are gradually accepted over time when they become more comfortable with the electronic functionality. It is an evolution process. But already there is a clear tendency towards trading FX options electronically, just as there was seven to ten years ago for spot and forwards."
360T has offered a request-for-quote functionality for FX options on the portal for the past three years and in the last year further enhanced the functionality to enable trading, not just on the life-basis, but also with a separate delta hedge, to enable trading on a volatility basis. There is also functionality for standard options – call, puts, European and American style – as well as smaller structured products such as risk reversals, bull or bear spreads. STP has been achieved for those customers that have high options volume, using a XML deal export interface to treasury management systems, which was not very a common three or four year ago, according to Schorno.
He says: "We focus on first generation only, and 360T concentrates only on communication and execution. There are no analytics as we focus on a best-of-breed approach and believe there are already systems out there for pre- and post-trade analytics, instead we are looking at linking into such analytics tools. For posttrade, STP is available when transactions are executed into position-keeping systems."
Schorno says there is demand, on the institutional side, for hedging and leveraging, as well as generating alpha and the demand from the corporates is for physical and non-specific hedging. However, he adds, over the past few years there has been a backward towards plain vanilla, and less exotic, products. Schorno also believes that another area of growth will come from greater integration between execution venues and the providers of analytics, by embedding execution tools into portfolio analysis tools and treasury management system products.
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