Cboe’s James Arrante discusses growing demand for fixed income, FX algo

Decades-high inflation, the Russia-Ukraine war and rapid rises in Fed interest rates have dried up the market for risk-correlated assets, but led global investors to hedge their risks, which has ultimately boosted trading volumes and revenue for exchange operators.

At the Annual FIA Futures and Options Expo, we asked James Arrante if clients’ search for yield in fixed income has become easier and how it is affecting Cboe’s business in FX and US treasuries.

Speaking first about Cboe’s FX franchise, Arrante highlighted their expanding offerings, which have grown to include four different entities and seven platforms in total. Cboe’s FX business now covers disclosed trading solutions, a Full Amount platform, and non-deliverable forwards (NDFs) through Cboe SEF. That, according to Arrante, covers all manners of how clients interact in the market and provides them greater control of their trading process, enabling better execution and lower transaction costs for Cboe’s global customer base.

“If you go back to four years ago, we only had one entity offering one platform. Cboe FX has significantly expanded its products and services in these years,” he said.

In our conversation, Arrante also revealed a few interesting details about Cboe’s FX volumes, which increased by nearly 23 percent from a year ago. Around $40 billion a day are traded on the exchange’s platforms. Per recent statistics, Cboe FX’s monthly trading volume crossed the $1.01 trillion milestone‎ in September 2022. This figure was the second-best reading for the exchange’s monthly turnover since it hit a record peak in March 2020 at $1.2 trillion.

“But more importantly, resiliency has been excellent on our platforms. We’ve continued to maintain 100% uptime despite record volumes and heightened volatility, which is key for our clients. And in terms of quote traffic, today we’re handling nearly double the amount of orders that we saw a year ago. That really speaks to the scalability of our technology and we’ve done a great job handling record amounts of flow.”

Concerning Cboe’s latest initiative, namely their first ever US cash fixed income trading platform, Arrante explains that it leverages Cboe FX’s Full Amount matching protocol to allow for large order risk transfer with low impact, alongside capabilities in liquidity curation and analytics.

He also pointed out that traders are increasingly adopting multi-asset strategies and that’s why Cboe is looking to offer them access to a full range of investment products.

Arrante revealed that Cboe is readying the launch of its interdealer trading venue for on-the-run US Treasuries and expects to receive the first trades in the coming months. He further explained that the platform pairs dealers willing to transact anonymously at high volume with minimal information leakage. Arrante also confirmed that the exchange operator has already registered the platform as a broker-dealer with US regulators and is currently signing up dealer clients and a clearing broker.

“Our US Treasuries platform originated as an idea back in 2019, I believe, so it took us a while to get to where we are today. But we have a lot of conviction in our ability to grow this platform. We’ve gone through all the legwork of standing up the platform, including obtaining FINRA registration and broker-dealer registration with the SEC. And right now, we’re involved in a business development type of cycle to onboard our clients from legal and integration perspectives. Our Full Amount style platform will really lend itself to a block-style execution that we think is lacking in the interdealer market today.”

On a related note, FinanceFeeds Editor in Chief Nikolai Isayev touched upon an outstanding third quarter at Cboe Global Markets. Per a recent report, the Chicago-based company grew its net revenue 20% year-over-year to a record $442 million.

“Cboe saw heavy demand for its proprietary products as investors sought to hedge against market volatility amid recession fears triggered by high inflation, rapidly rising interest rates, and geopolitical turmoil,” Arrante added.

Turning again to the FX business, Cboe saw strong volumes as monetary policy divergence rattled markets with an ADV topping $41.3 billion during third-quarter 2022 alongside a record spot market share of 17.8%. Cboe FX’s Full Amount offering, which provides clients with a solution for larger order risk transference with low market impact, increased 24% year-over-year to reach a record ADV of $12.3 billion in the quarter.

Finally, Arrante attributes part of the solid performance at Cboe, which provides trading in equities, derivatives, FX and digital assets across North America, Europe and Asia-Pacific, to continued product innovation.

“We’re in a period of sustained market volatility, which has been good for the exchange business. And again, the resiliency of our platforms really helps to win market share. We’ve earned the trust of our clients by maintaining operations and being able to handle their orders. That’s helped us to achieve those volume levels. I think we’ve done a good job of rolling out new and unique products over the last couple of years.”

It’s been over a year since Cboe FX Markets teamed up with XTX Markets to launch a hosted algorithmic execution service. We asked Cboe’s senior director why he thinks algo trading as an execution strategy continues to gain popularity with FX traders.

Although still very much in its infancy in the spot FX market, Arrante thinks the use of algorithms will continue to grow. As clients have many different priorities, Cboe FX aims to make access to the algo order type as easy as possible.

“We are seeing some appetite from our clients and the broader FX community. Clients became aware of how much they were spread crossing, and decided that using algos and trading in a more passive manner would be cost effective for them,” he said.

XTX Markets’ Execution Algo enables Cboe FX users to benefit from its implementation shortfall execution algorithm, which aims to reduce slippage to arrival price. The institutional FX venue has also secured exclusive rights to deploy the XTX Algo in the anonymous ECN space.

Arrante concluded Cboe FX is looking for opportunities to enhance their customers’ trading experience, and continues to seek customer feedback to better understand what they want within FX execution.

“The sophistication level of clients varies quite a bit; some are able to programmatically manage those orders, some may not have those capabilities. I think giving algo execution to clients is pretty attractive if they’re not able to do it on their own behalf, or unwilling to do it. Secondly, clients are aware of information leakage in the market. So, the ability to chop up a large order into much smaller orders that are not as detectable is generally where algos become attractive.”