2021 is the year of the non-bank market maker in FX: Optiver leads the way on FXall

Clearly, the banks are being shown a clean pair of heels by the most advanced companies in the FX business. Let’s hope that this paves a new way forward for OTC counterparty relationships and that execution and settlement is now the channel for innovation.

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Whilst Holland’s locked down citizens are overturning cars, burning down buildings and rampaging in the streets in a desperate attempt to win their freedom back from the restriction-obsessed pseudo-communist government which shares its ideology with governments in most of now tyrannical Western Europe, it’s Holland’s financial markets geniuses that are forging ahead and making FX industry history.

Based in Amsterdam, Optiver is a proprietary trading firm and market maker for various exchange-listed financial instruments. Its name derives from the Dutch optie verhandelaar, or “option trader”. The company is privately owned. Optiver trades listed derivatives, cash equities, exchange-traded funds, bonds and foreign exchange.

Today, as the good people of Holland fight for their liberties and livelihoods, Holland’s Optiver gives the FX industry a further edge toward democratization, and increases the onslaught against the Tier 1 banks which are flagging as their sky-high stipulations and preferential execution techniques are less attractive to most of the OTC FX world than the higher technology and better service offered by non-bank market makers.

Until two years ago, global market share in Tier 1 FX interbank dealing was dominated by Citigroup, which for 17 years held the top slot, until it was superseded. However, Citigroup’s long term domination of the entire global top level FX market was not put to an end by one of the other Tier 1 interbank FX dealers such as Barclays, Deutsche Bank or Goldman Sachs. It was knocked off its top position by XTX Markets, which had never been considered a top level Tier 1 dealer at all previously, but it very much is now.

To this day, XTX Markets holds the top place globally for Tier 1 FX order flow by market share, and some of the other well known market makers are now in the top ten, including Citadel Securities.

Brokers are clearly eschewing the single dealer platform model offered by banks, and perhaps rightly so. It is, after all, a legacy model as is most things with banks, and the obnoxious attitude – started by Citigroup – that all OTC derivatives companies must have a continual balance sheet of between $50 million and $100 million to be able to maintain a prime brokerage agreement is clearly not a popular method.

Banks make most of their money from investment banking and tier 1 FX dealing, yet they treat their own counterparties with disdain, expecting high balance sheets, conducting last look execution and cherry picking. If an OTC broker did any of this, there would be a furore, hence brokers are now voting with their feet.

Optiver has taken this one step further, having today 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.

FXall is an absolutely consummate contender within the electronic trading business, and this union between Optiver’s non bank market making prowess and FXall’s stance is very likely to be a milestone in change for the FX industry, giving massive hope to brokers.

Four years ago, Thomson Reuters, which acquired FXall in 2012 for $625 million, bringing with it FXall’s CEO Phil Weisberg to run Thomson Reuters’ Global FX division, has opened up access to bank algorithms with a new platform that aggregates FXall QuickTrade which is the firm’s request for stream service, along with Bank Stream which continuously streams prices, and the firm’s central order and limit books along with the conventional dealing platform.

The new single desktop solution that combines these elements is called “FX Trading” and according to Phil Weisberg “brings together access to all of Thomson Reuters venues liquidity on one screen which means that a segment of our customers will for the first time have access to bank algos that were previously unavailable to them.

This solves some of the difficulties associated with having to continually maintain direct relationships with banks for FX brokerages and primes, at a time during which credit is being restricted dramatically by banks and reluctance to take counterparty risk is at an all time high.

It is possible that this new evolution may release some clients from a house bank trading mentality, bringing them access to the enlarged pool of liquidity and algos that are now within accessible reach of firms that no longer have to access direct bank liquidity.

Mr Weisberg himself is an absolute expert when it comes to OTC FX. He joined FX industry software provider oneZero in 2019 as Strategic Advisor as the company expanded its remit toward institutional participants and is now Executive Vice President of Strategic Planning and Partnerships at the company.

Clearly, the banks are being shown a clean pair of heels by the most advanced companies in this industry. Let’s hope that this paves a new way forward for OTC counterparty relationships.

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