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Interesting to see EBS BrokerTec, adding an FX Options capability to their relationship based liquidity solution EBSDirect, through a licensing agreement with FX Bridge Technologies.

The agreement will allow EBS to develop an FX Options capability to round out the OTC coverage for the platform, providing relationship based disclosed FX liquidity across spot, Fwds, Swaps, NDFs and FX Options.

As part of the agreement, Steven Best, ex-CEO of FX Bridge, will transfer to EBSDirect, and oversee the development as Head of FX Options.

Stephen Best, Head of FX Options, EBS Direct, said:

“EBS BrokerTec has built a remarkably successful relationship-based business in EBS Direct over a very short period of time, leveraging its extensive network and strong reputation.

The launch of FX options is an exciting and natural expansion of its offering. FX Bridge’s state of the art technology will empower our customers to access FX options through EBS Direct and I am excited to work with the team to bring these capabilities to the market.”

In terms of size, FX options only accounts for around $156bn/day or roughly 5.5% of daily FX volumes, based on the latest Bank of England FX survey, as shown in the chart below.

Daily FX volumes by Pct of total/product based on data from Apr 2015 Bank of England FX semi-annual survey

In terms of electrification, FX Options lags way behind the other FX products, with 21% electronically traded in London, and only 9% in NY, compared to an overall eFX ratio across all products of 41% in London and 50% in NY.

eFX ratios by Product

Comparing the data from the two most recent Bank of England and US Federal Reserve FX survey’s, we see that overall eFX ratio’s in NY were 50% (52% prev), compared to only 41% in London (42% prev). What’s striking from the data, is that in NY whilst eFX ratios fell for all product groups, FX Options showed the biggest overall drop down from an eFX ratio of 15% to only 9%, a -40% fall over the period, whilst in London, the eFX ratio for FX Options rose some 6%.

The drop in

Table and chart showing eFX ratios in London and NY/product and the Pct change between Oct 14 and Apr 15

The reason for the low eFX ratio, is the very bespoke and custom nature of FX Options, and lack of standardised STP solutions, indeed only yesterday Bloomberg and ICAP’s Traiana announced a joint venture to create a solution for FX Options Post Trade processing. Corporate clients, who account for only 4% of FX Options vols (see chart below), typically require bespoke tailored option structures to meet their hedging requirements. The more customised and bespoke the options structure, the more likely to be voice executed rather than screen based.

Chart showing % of daily FX Options vols in London by client segment
(Bank of England Data Apr 15)

This becomes apparent, when looking at channel of execution. As can be seen from the chart below, the first three red bars represent voice and direct manually executed channels, either clients direct with dealers (phone, chat etc), or dealer to dealer or through voice brokers. Whereas the three smaller blue bars represent electronic execution through Broking platforms and Single and Multi-Dealer platforms.

Chart showing % of daily FX Options vols in London by method or channel of execution
(Bank of England Data Apr 15)

 Chart showing % of daily FX Options vols in London, SDP vs MDP execution channel
(Bank of England Data 2008-15)

Looking again at the US FX Options data, we can see when comparing Apr 15 with the previous data set from Oct 14 that one of the components of eFX ratio, namely SDP&MDP volumes nearly halved from 11% to 6%, whilst execution by voice broker rose from 30% to 38%, the combination of the two causing the eFX ratio to drop from 15% to 9% over the period.

Chart and table showing % of daily FX Options vols in NY by method or channel of execution
(US Fed data, Oct 14 and Apr 15)

If we now compare FX volumes in US across all execution channels for all products, we can see that overall volumes fell some 20%, with execution across channels falling between -22% to -37%. Voice broking being the only channel to show a rise, up 19% over the period. The rise in voice broking, tends to reflect reluctance on the part of liquidity providers to offer electronic liquidity during periods of increased volatility, which fits in well with the January EURCHF dislocations and increased volatility in markets.

Chart and table showing % of daily all FX volumes in NY  by execution channel
(US Fed data Oct 14 and Apr 15)

Whilst on the subject of US market and electronic execution, an interesting chart caught my eye from Kevin McPartland over at Greenwich. The chart an extract from their proprietary institutional Buyside study, that looked at the use of e-trading by institutional investors in the US. The chart shows the proportion of volumes traded electronically across products. Leading the way (on the back of mandatory SEF execution) are Credit Derivative indices at 93%, followed by FX at 76%. I guess that really puts the eFX ratio for FX Options of 9% into proportion – a way to go to automate that market.

Greenwich Associates Institutional Buy-side execution survey results 2015

Filed under: FX, OTC, Paul Blank, Regulation |