Optiver becomes first non-bank options market-maker on FXall

Dutch e-trading firm joins OTC FX options platform in a market taking electronic baby steps

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Listed options liquidity provider Optiver has become the first FX options non-bank market-maker on foreign exchange trading platform FXall. 

The move marks another milestone in the evolution of the over-the-counter FX options market – a market making ponderous progress toward electronic trading.

The market-maker joins more than 66 other firms now providing electronic options liquidity on FXall, which has traditionally been a haven for banks dealing FX options to clients. Overall volumes on the Refinitiv-owned platform grew by 26% in 2020.

While Optiver can in principle begin market-making to around 150 counterparties, it does not yet have buy-side clients and will initially make markets to banks on the platform.

“We’re newcomers in this market,” says John Rothstein, chief executive at Optiver UK. “Right now, we only have bilateral relationships with other dealers, but we’re trying to discover ways to be additive to the market. Leveraging technology such as Refinitiv’s FXall platform is a great place for us to start providing alternative liquidity.” 

The Dutch market-maker started trading on FXall on November 25, 2020, some 24 months after talks began. Client calls to add Optiver came predominantly from regional banks, but also from some agency brokers and hedge funds.

“Optiver has been a major liquidity provider on the CME FX options market for a long time,” says Jill Sigelbaum, head of FXall at Refinitiv. “While the shorter-dated contracts are most liquid, there is consistent interest all the way up to 12 months. The OTC FX options market similarly has the majority of flow sub-12 months, with a lot of it being three months and under. The liquidity profiles of both markets are symmetrical, so their offering is a good fit,” she adds.

The non-bank liquidity provider first came into the OTC FX options market in 2017 when it was trading directly with banks. In the fourth quarter of 2019, it joined various interdealer broker markets run by the likes of TP Icap, Tradition and BGC Partners – but it took some time before banks felt comfortable letting the non-bank into the interdealer market.  

Leveraging technology such as Refinitiv’s FXall platform is a great place for us to start providing alternative liquidity
John Rothstein, Optiver UK

“The banks’ concerns were whether Optiver was a market-maker or a market-taker,” says an FX options broker. “Once they realised that they were a tremendous liquidity provider to the markets, that kind of eased any tension the banks had.” 

Rothstein says the firm’s ability to warehouse a lot of risk to expiry in short-dated options –typically overnight to one-month – has enabled it to gain a foothold in the OTC market. The closer to expiry, the riskier it can be for banks.

“Once you get into very short-dated trades, the risk-versus-return becomes much less attractive,” says Mark Suter, founder of competing FX options trading platform Digital Vega. “These options are much more sensitive to gamma risk, which means your underlying spot position changes much more rapidly,” says Suter. 

“The banks prefer to trade longer-dated options where there is much greater vega – or option value – and less sensitivity to underlying spot risk,” he adds.  

Electronic culture club

The move into the OTC market is likely somewhat of a culture shock for Optiver, a high-speed, electronic market-maker used to the central limit order book world of listed options. The interdealer market is still predominantly voice brokered, while electronically matched order books are still at a nascent stage.  

“We very much believe in electronic markets and there is something appealing to a firm like us about displayed liquidity as it’s a level playing field,” says Rothstein.  

Trading in the FX options market has moved increasingly to an electronic basis over the past 10 years. According to the Bank for International Settlements’ triennial survey of 2019, the share of electronically traded FX options via a single- or multi-dealer platform is now 30%, versus 8% in 2010.  

Today, nearly a third of liquidity providers on FXall are responding to request-for-quote orders automatically via an application programming interface, or API. Optiver will initially make markets manually but is undertaking work to connect via an API

Digital Vega, which operates as a request-for-stream platform, is soon to launch an order book for FX options and is open to Optiver and other non-bank market-makers joining the party. 

“We’ve been working with most of the big banks over the last two years because they are tired of paying large amounts of brokerage to voice brokers,” says Suter.  

Market-makers and takers both still pay hefty fees to voice brokers to get trades executed, says Suter. His model will instead pay the market-maker a fee for the provision of firm liquidity and charge the price-taker significantly less than they are currently paying, particularly in emerging markets and less liquid pairs. 

Suter’s firm aims to reduce transaction costs for participants by as much as 80%. 

The demand from clients to go electronic has been slower in options than in other products, says Sigelbaum. Clients like to check with their sales coverage before executing and relatively low options volumes have not been a driver of demand.  

FX options are a complex product and require a lot of investment to get pricing across the curve to be accurate,” she adds. “As volumes are relatively small compared to cash trades, the operational efficiencies for automation were not as pressing as they were for cash. With much of the cash market now fully automated, it was only a matter of time before FX options followed.” 

Voice brokers say the slow progress towards electronic FX options trading can be laid at the door of the banks. While many aggregate live prices from brokers for standardised options trades to see the best bids and offers, many bank traders still pick up the phone to confirm a price. 

The FX broker source claims only two banks are capable of trading directly off their aggregators today but expects that to pick up in 2021.  

“I can kick and scream as much as humanly possible, but it’s a matter of the banks’ priority, of what they want and what they don’t want to do,” he says.  

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