FX Options is massive in the US and hardly relevant elsewhere. Why?

FX Options are very rare in the UK, yet a mainstay of the electronic trading sector in America. With the regulators and exchange lobby looming, on-exchange options may be the way to go, however one particular British firm has just bowed out altogether


Today, British deliverable FX company World First closed down its FX Options division, with fifty staff likely to be transferred to other divisions of the company as a result.

British deliverable FX firms dominate globally as outlets for exchanging foreign currency rather than trading it, household names such as Travelex being omnipresent at airports and institutional liquidity providers in London such as Sucden Financial and LMAX whose core business in the eFX industry is to provide liquidity to brokerages also operating sizeable deliverable FX divisions.

World First’s currency options contracts were primarily designed for commercial settlement purposes rather than for leveraged margin trading by retail customers, their main position being to provide companies with a facility to purchase currencies on specific future dates at specific prices, representing a higher risk than those in mainstream use by large publicly listed companies which work directly with their banks.

Before everyone falls asleep, there is an interesting point here. Deliverable FX by itself may be a cure for insomnia for those used to the adrenaline fueled retail spot FX world, however World First, a company with thirteen years’ experience that was established by Jonathan Quin and Nick Robinson that was originally operating from a basement flat in Stockwell, South London.

Both of its founders had a combined experience of 10 years in corporate banking and expanded World First into a very large deliverable FX firm with operations in Singapore, Hong Kong, Washington, Austin (Texas) and Amsterdam alongside the original London office, and has been involved in FX options and derivatives hedging via its World First Markets subsidiary since April 2008.

Thus, it is quite similar in terms of positioning to a discount brokerage aiming its services at small corporates rather than retail clients, rather in the same way that the listed FX options sector in Chicago does.

There is a vital difference, however. Chicago’s FX options firms do not shut entire operations down and go away from that particular asset class altogether. Quite the opposite, they are by comparison to everywhere else in the world, towers of strength.

CME Group, for example, via its Globex futures and options platform, handles an astonishing number of contracts per day. Singling out January 31, 2017, which is not an extraordinary point of reference by any means, 120,331 British pound futures contracts were traded, along with 3,194 British pound options contracts.

The British pound options and futures contract is by far the most traded currency on CME’s globex platform, with over 100,000 more contracts being traded per day than any other currency except the Australian dollar at 96,524 on January 31. The rest of them are into the hundreds in most cases, or low thousands at the most.

At the end of last year, Thomson Reuters, which owns the FXall institutional electronic communications network (ECN), with former CEO of FXall Phil Weisberg having presided over the global FX division until his departure at the end of 2016, made a clear observation that FX Options were on the rise in the derivatives industry.

Mr. Weisberg said in November “Due to their inherent complexity, FX options have been the last FX instrument to move from OTC markets to electronic platforms, but best execution requirements are seeing options volumes and participants on our platforms really flourish.”

“We are finding that in today’s highly fragmented and increasingly scrutinized FX market, price-takers – buy-side firms and smaller banks – want to use platforms that offer optimal transparency and help them prove effectiveness of execution whether it is mandated or not. They also want the efficiency and flexibility that comes with the feature-rich workflow tools that electronic platforms can provide” – Phil Weisberg

In America, maybe… Not elsewhere though.

In Britain, spread betting and CFD providers offer FX Options products, but their popularity pales into insignificance compared to the gigantic CFD businesses that are the de facto trading environment in Britain, which is interesting because a CFD is a type of OTC futures contract in itself.

The interesting matter with regard to measuring the popularity of FX Options in the US compared to elsewhere, is that the figures that are available from each executing venue or brokerage are completely accurate because they are often executed through a centralized exchange (certainly in the case of the US entities).

With regard to measuring OTC products, this is a deal harder due to the various methods which privately listed companies use to measure volumes.

Finally, a move toward FX Options may be a means of mitigating the proposed rulings on CFDs and other leveraged products by British, German and Cypriot regulators, a decision on which many senior executives in the FX industry hold an opinion that it was brought about by a lobbying effort from the listed derivatives sector which is seeking to push the OTC derivatives sector onto exchanges.

If the recent mergers and acquisitions interests by various European exchanges which were highlighted by FinanceFeeds in a very detailed report recently is anything to consider a measure of that dynamic, FX Options may be the way to go.

Photograph: Royal Exchange Buildings, London

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