THETRADETECHFX DAILY from the floor
What has been the most significant change in the FX options market over the past 12 months? Marketwise, we have observed that investors are more active in using FX options mainly by selling volatility to harvest implied or realised risk premia. Also, within carry generating ideas, real money managers are increasingly shifting to option-based overlays. As experience grows and technology improves, portfolio managers are also gaining confidence and increasingly utilising a wide variety of currency option structures, hence why we saw a pick-up in volumes and ticket count throughout the year. To address this increase in activity, we try to separate between low and high touch as much as possible to stream-line our workload and reduce operational risk.
As the FX options market continues to evolve where do you still see the biggest inefficiencies? Some vendors are still having difficulties to integrate workflows for the purpose of a smooth in- and outbound processes.
The evolving FX options ecosystem
The TRADE catches up with CHRISTIAN BEINERT, FX trader at MEAG, to explore how fragmented technology, manual workflows, limited liquidity and transparency continue to hold institutional trading back when it comes to the FX options market becoming more electronic.
Hence, burdensome manual intervention within the process chain of trading, booking and throughout the lifecycle of FX options are the main hurdles still in place – for example, the management of exercises with regards to pin risk. Additionally, liquidity providers are still reluctant to auto-quote and stream larger FXO-volumes, in particular when broken dates, rather illiquid currency pairs and non-plain vanilla structures are involved. Consequently, buy-side participants also tend to refrain from requesting larger electronic trade sizes, as the necessary setup and liquidity support are often not yet in place. Moreover, for some buy-side firms, the often bespoke and non-standardised nature of FX options continues to necessitate close collaboration with liquidity providers, supported by long-standing, trusted relationships. On top of this, the lack of transparency for pre- and post-trade TCA still causes headaches for the buy-side – despite efforts to address these by using ECN pricing and keeping in contact with bank and non-bank providers to get insights into axis.
What does the ideal FX options ecosystem look like from a buy-side perspective? Specifically, I would say these span: Streaming volatility for meaningful tenors and volumes, seamless workflow solutions from front to back-end systems, bullet-proof lifecycle management of FX options, and more standardised trading approach across different platforms.
What developments do you think will have the biggest impact on the FX options ecosystem in the coming years? Best execution and TCA requirements from the buy-side, as well as regulatory changes will probably be the largest driver for the FXO ecosystem going forwards, hopefully bringing improved pricing engines, market data availability and more efficient pre- and post-trade processes with them. Clearly, liquidity providers have to make their assessment where to put their infrastructure build out wisely across a more fragmented vendor world to meet clients need best with some of them moving faster to this solution.
“ The lack of transparency for preand post-trade TCA still causes headaches for the buy-side.”
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