FX options have historically lagged spot and forwards in electronification. Is that still the right way to look at the market?
Options are in a very interesting phase. The main feedback from clients to date was that it simply takes a while to execute an option,
and that covers everything from price discovery and reference data to the trading process and post-trade processing.
Oleg Shevelenko
Clients said it could take hours from start to finish, so our objective is to shorten that cycle. The mantra now is to do more with less: execution sizes are smaller, but the number of orders and instruments being managed is larger. The focus on our side is not strictly on electronifying options, it is on making the trading process more efficient. We would like to meet clients where they are, rather than dictate how they trade.
Where does that leave the parts of the market that aren’t electronic?
At Bloomberg Electronic Markets, we think of execution as a spectrum. At one end, for electronic pricing, we have connected, what we believe is the largest number of liquidity providers: close to 50 broker codes, or desks. Clients can build the option in the Terminal (the pricing calculator is enhanced continuously, so they can model with their own data and assumptions) and request a price through an automated RFQ.
Further down the spectrum, we allow clients to send an RFQ to a human being to pick up over the Terminal. That keeps them in an RFQ-style environment with best price, audit trail and competing quotes for post-trade analysis, without limiting the RFQ spectrum to banks capable of auto-pricing.
The last part of the spectrum is still voice, and a lot of options are executed that way. So, we built tools that let clients capture those voice trades and turn them into an electronic ticket, automating confirmation, booking and reconciliation that previously took minutes or hours by hand.
Does that flexibility matter more as the structures get more complex?
We keep bringing in more electronic liquidity for vanillas and for first, second and third generation exotics, and that goalpost keeps shifting. Clients are automating vanillas, but from an alpha perspective they are moving into more exotic structures, so we have to automate those too. At the same time, not every shop is capable of, or allowed to, trade all the way out to the exotic and super-exotic end. Where clients are limited by internal compliance rules and fund restrictions, we help them organise the workflow, so they execute according to predefined rules.
What is driving demand from hedge funds and asset managers for more programmatic execution?
Partly that ability to do more with less: there needs to be a process on the client side for how they execute, and everything has to fall into it. That is where we come in, giving clients a clear backbone and operational framework. But what it looks like in practice is very much client dependent. A fully automated hedge fund wants a programmatic process, internal to its own systems, to generate an option, and then access to liquidity. We give them our market data to create the option, and we have just released an RFQ API so they can RFQ automatically from their own systems without touching the screens at all. They keep their infrastructure completely isolated but do not need to integrate with dealer one, two and three: they get a single connection and a single API for both the RFQ pipes and the market data.
Asset managers need a different set of functionalities. They typically use very well-defined order management systems and need connectivity into us, so the plumbing is different: we have built tools to connect to the client’s OMS and launch a ticket automatically. The story there is twofold: efficiency and liquidity. Rather than create an option, go to multiple chats for a price, then run a separate process to book and reconcile, it is all bundled together, and once the trade is done, we send automated booking messages into their systems.
We have seen about 58% growth in volume on the options platform as a result, which is staggering and, to a degree, unexpected. Hedge funds are leading the pack with 75% growth.
As more of the FX options workflow becomes electronic and API-driven, how will the nature of the trading role evolve?
We are only at the beginning of the journey in options, and what we have learned from other FX instruments is that data is the key. From a TCA and MIS perspective we have started storing every data point across the option lifecycle – order generation, the RFQ process, the quotes themselves. That allows clients to work out the best set of liquidity providers for a given option structure, which was not possible before; previously it was based on feel.
If clients transact with us fully via API, they can store those events on their own side, which lets their newer AI tools work out the best way to execute; which liquidity providers to send a request to, how many of them, how long to wait for quotes. Getting a price from one or two providers used to be a success in itself; the next phase was getting it in reasonable time. Now clients can not only electronify execution and gain on timing but organise the market around themselves and access a bilateral market, where buy-side and sell-side hold the same data sets and use them to execute smarter.
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