As FX markets and their structure continue to evolve, experts at TradeTech FX turned their focus to the FX derivatives space as it starts gain some traction across the industry, particularly as automation begins to take shape in the options market.
John Rothstein
Following some growth in FX options in recent years, panellists assessed the key drivers behind this, most notably, the electronification of trading platforms as the market begins to move away from traditional voice-based trading towards electronic execution, marking a change from years before.
However, the experts were also quick to point out that the options market automation transformation, while growing, is slow, particularly in comparison to other instruments.
“From our perspective things have changed,” said John Rothstein, UK chief executive at Optiver.
“We have sat on this panel for a number of years now and sometimes we’re really searching to say what’s been different from the year before. It is a quite slow moving, but we are starting to see some change.”
In particular, Rothstein commented on specific areas of the market which are seeing a slow growth, such as all-to-all trading adoption in FX markets, in comparison to other asset classes, and challenges such as technology infrastructure were also highlighted as key obstacles to widespread electronic uptake.
Speaking on this, Toby Baker, head of FX trading at T. Rowe Price, also said: “A frustration of mine is that an FX option is a derivative of an FX product that we train and analyse to the third degree but as soon as you make it a derivative it sort of goes out the window. We try and do price discovery on a product like FX spot we can trade on an algo, FX swaps, NDFs, everything else but with derivatives it still feels very slow to progress.
“So, I’m excited by the FX options market but it’s been a very slow growth up to this point.”
A further pain point in a shift towards electronification and technological advancement underlined during discussions also related to the implementation barriers preventing widespread adoption of TCA solutions, with an emphasis that TCA tools need to become standard workflow components, to drive this process improvement.
Additionally, panellists were also quick to point out the disconnected nature of options markets from recent market volatility and geopolitical shifts, with FX options at decade lows despite this.
Addressing this, Baker indicated that although volumes were low, options are still being traded, however other assets, such as bonds, continue to dominate during times of uncertainty.
He said: “I’ve said for many years that having FX options in your artillery or having it something in a portfolio just as a what if scenario makes a lot of sense. They’re very cheap now and they’re cheaper today than they were this time last year. But it certainly makes sense in a volatile or unexpected expected environment to own some sort of bond.”
Despite remaining obstacles, it appears that the FX options, and wider derivatives market is beginning to change, albeit slowly.