The company is looking to capitalize on the increasing interest from buy-side clients to execute on its Bloomberg professional terminal, where spot and forwards volumes have increased 79% year-to-date. It is also tapping into the increasing adoption of electronic execution of options, which has traditionally been conducted over the phone.
FXGO users can now use a request-for-quote (RFQ) system to price options from banks on Bloomberg’s network. In addition, Credit Suisse and Bank of America Merrill Lynch (BAML) are providing auto-pricing, quoting electronically through automated pricing engines.
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| Tod Van Name: "Our platform has significant reach, we have 230 banks that already provide pricing ..... any one of those can pick up an RFQ and price an option." |
The main difference is that an RFQ requires banks to manually input a price once a request has been made, while Credit Suisse and BAML will return a price instantaneously derived by their internal systems based upon a client’s defined option and hedge parameters.
Bloomberg says a further 12 banks are in the pipeline to provide auto-pricing on FXGO, streaming option premiums to clients, with a handful close to going live. At present, 27 other banks are providing manual pricing.
Tod Van Name, head of FX and economics at Bloomberg, says adding options to FXGO is a logical progression of where the market place in FX is headed, given the move towards electronic trading in the product.
This trend has been given added impetus ahead of regulation that is likely to require options to trade on an exchange or a swap execution facility and to clear through central counterparties.
Looming regulation also explains the increasing willingness for leading FX banks to provide options pricing to external platforms, according to Van Name.
“It stands to reason that banks have probably been somewhat protective about losing or jeopardizing a franchise that has been very profitable,” he says.
“One of the catalysts for the development of this product, and certainly for the interest from the sell-side to participate, has been regulation.”
Joerg Schmuecker, global head of FX options e-commerce at Credit Suisse, concurs.
“It is clearly going to be important for end-users of these markets to have access to multiple-bank trading systems as new regulations designed to achieve best execution are introduced,” he says.
Finding an edge
FXGO’s options offering is at an earlier stage of its development compared with other multi-dealer platforms, such as Digital Vega and GFI Fenics, which have been in the market for some time.
However, Bloomberg believes the scale of its liquidity pool, quite apart from the fact it does not charge commission on either side of a deal, gives it an edge.
“Our platform has significant reach, we have over 230 banks that already provide pricing [spot and forwards] over Bloomberg, and any one of those can pick up an RFQ and price an option,” says Van Name. “In addition, there are many FX banks that want to be able to price electronically on the platform.”
Bloomberg also points to the fact FXGO is connected to the analytics on its platform, which ranges from news to price discovery and valuation, as another factor that differentiates it from the competition.
Crucially, it is also integrated with OVML, Bloomberg’s options pricing tool.
Some 4,000 of Bloomberg’s subscribers use OVML on a daily basis. The firm says if the number of asset managers and corporates who use the tool to price weekly or monthly hedges is taken into account, that figure rises to five digits. Those users can now click straight through from OVML to trade options on FXGO.
“In terms of those we think will be prime targets for this service, we already have a huge universe of those clients on board,” says Van Name.
Price takers are now able to launch trade tickets directly from OVML and similarly banks that are manually providing pricing have the ability to launch the pricer straight from the pop-up RFQ request ticket, allowing them to seamlessly check prices and valuations before responding to the RFQ, Bloomberg says.
Bloomberg says, in the couple of months it has been testing its option product, growth has been faster than it forecast. Volumes have been three times larger than expected, while the number of users trading on the platform, primarily corporates and asset managers, has also exceeded forecasts.
By way of comparison with the 4,000 users of Bloomberg’s option pricing technology, Euromoney received 3,533 client votes for option volumes in its 2012 Euromoney FX survey totalling $4.8 trillion, almost entirely executed directly between banks and their clients.