Richard Bailey joined Infinium last week as head of FX options trading and is based in London, where he reports to Infinium’s head of FX asset class Gordon Wallace. In an interview with EuromoneyFXNews, Bailey says Infinium is positioning itself for a niche role in the FX options market by working with banks to add liquidity where needed and populate promising multi-dealer platforms (MDPs) as they come online.
Bailey says Infinium’s approach to the FX options market is the same model the firm has deployed for 10 years in other markets.
“If you walk into a bank, we already deal with their desks from interest rates to energies and agricultural products,” says Bailey. “The move into FX options is an expansion of our business model to the most global asset class.”
As such, he says Infinium is set to become a nimble-yet-effective player in an FX options market facing a raft of incoming changes from regulatory initiatives in the US and increasing reliance on MDPs.
An evolving space
Bailey says Infinium’s FX options business will eventually look to provide competitive streaming option prices on MDPs, and then match those trades with similar contracts listed on exchange-traded FX options platforms, such as the one run by CME, where they can eventually be centrally cleared.
“When I left SocGén, I was asking myself: ‘How is the FX space going to evolve?’” he says. “And the way I was looking at it was that a lot of smaller banks are really going to struggle in the options space because the industry is getting more electronic, cost sensitive and risk averse.”
Bailey says large banks that typically dominate the FX options market by negotiating over-the-counter deals with their client base are going to struggle to provide the same level of bespoke service for companies looking to transact the products when the majority of trading goes digital.
“The banks are increasingly challenged to move fast and efficiently,” he says. “As a business, they are more cost heavy. At Infinium, it’s a company of 200 people and 150 of them are traders. We are expanding in London while others have to make cuts. We do not have the overheads the big banks have, and our costs per person are significantly less.”
Bailey says he decided to leave SocGén and work within a more specialized space at Infinium because the smaller firm offers a “very agile, young, aggressive and interesting” environment.
Bailey adds that he does not foresee Infinium’s plans to become a market maker in the FX options space ever posing a threat to large banks competing with one another for client pricing on MDPs.
However, he believes that the nature of the firm’s existing relationship with exchanges in other markets means takers for Infinium’s FX options prices will benefit from the company’s experience in fast and efficient trade execution and clearing through exchange facilities.
“I like Infineon because exchange trading is what they have always done,” he says. “We know that sort of model – a cleared model, fast, electronic and a very rapid execution of electronic delivery of FX options. It’s what we do.”
Long-term outlook
The anticipated transformation of FX options MDPs into swap execution facilities (SEFs) under the Dodd-Frank Act in the US also means that competition in the market to provide the products to buyers and sellers is going to be liberalized, and firms with specialized businesses, such as Infinium, stand to benefit as a result, he adds.
“Once the option goes on an SEF, why can’t Infinium stream a price to you just like anyone else?” he asks.
At the moment, Infinium interacts with exchanges on behalf of clients and agency brokers looking for FX options pricing in a similar fashion to the way most small banks deal with the exchange, says Bailey.
Long term though, Bailey says he wants to use Infinium’s FX options business to turn exchanges into clients, for all intents and purposes. For example, when an exchange is bid in the FX options market, then Infinium can flow trades from MDPs into the exchange as well as warehouse risky trades for eventual filtering through exchanges and their clearing mechanisms.
“We can offer independent pricing to market participants that some banks won’t even give quotes to in the market,” he says. “We’ll sit with those firms and take them very seriously, whereas a lot of banks do not even want to see that flow because the clients are asking for too much attention.
“But to us, we don’t care. That’s fine. We haven’t got any sales people but I also haven’t got to pay for any sales people.”
For now, though, MDPs offering FX options pricing are still not seeing the majority of market volumes flowing through their platforms, and Bailey says Infinium will have to wait some time before its plans to become a market maker can come to fruition.
“Most FX options MDPs have been very ambitious very early and people have not caught up,” he says. “They’ve got a way to go before any winners start to separate themselves from the pack.
“It’s not the platforms – the economics of them are fine. They just simply don’t have the liquidity, and while you can get a trader to put some prices on an MDP for a few days, if it’s not making his work more profitable or more efficient, it becomes a distraction.”