Tullett Prebon has teamed up with exchange technology group GMEX to develop a hybrid voice and electronic trading platform for foreign exchange options.
The planned platform, which integrates GMEX’s request for quote technology with Tullett’s existing central limit order book capability, is intended to offer the combined benefits of electronic trading and traditional voice broking to deliver more efficient trading and aid market liquidity.
“The trend now is for our customers to employ fewer FX options traders,” David Perkins, managing director for electronic broking at Tullett Prebon, told IFR. “This has resulted in each trader being responsible for managing more positions per head than was historically the case. We therefore need to provide a range of solutions that are efficient and compliant and can help them to source liquidity and manage their risk even more effectively.”
In a market previously dominated by voice broking, traders report a widespread shift towards RFQ trading protocols in response to the changing liquidity environment. Trading in FX derivatives has increasingly shifted to a small core of at-the-money contracts, while liquidity has declined in alternative strikes and more esoteric products.
“Some at-the-money options have enough liquidity to support a central limit order book. For other products that don’t trade as regularly, there is a need for RFQ functionality,” said Perkins. “In both cases our voice brokers retain an important role.”
Gross notional outstanding in over-the-counter FX options fell 20% during 2015, to US$11.4trn, according to data from the Bank for International Settlements.
According to Hirander Misra, CEO of GMEX Group, development is under way and the platform is expected to be operational for the first wave of clients in early 2017.
“While customers can trade on the CLOB or by RFQ, there’s a lot of room for both models to interact and come together, and that’s where the hybrid model comes in,” said Hirander Misra, CEO of GMEX. “The key issue is how best to marry the RFQ and CLOB functionalities to ensure that the platform is agile and efficient in the new regulatory landscape.”
Following the development phase, GMEX will continue to oversee the technology through a second wave of enhancements and provide any further upgrades as a result of new regulatory requirements such as MiFID II, which is set to go live in January 2018 and will push many derivatives products onto a new category of regulated platforms.
The project is not affected by the planned merger of ICAP’s legacy hybrid broking operations into an enlarged Tullett. The transaction is expected to close before the end of the year, pending regulatory approval.
ICAP’s FX options capabilities were part of VolCall – a joint venture with Tradition that was not included in the acquisition. VolCall, which was launched by the two brokers in mid-2013 as part of the Vo Broker, offers hybrid trading across G10 options, with capabilities for clients to request a range of products, including puts calls, spreads, straddles, strangles and butterflies.
The hybrid platform is the latest in a string of projects for GMEX. The exchange group, which launched its own interest rate swap futures contract last year, recently partnered with Seed CX to develop an exchange for hemp swaps. It is also working closely with the Hanoi Stock Exchange to launch Vietnam’s first derivatives market and integrated clearinghouse.
“Our core platform is multi-asset and multi-language, having the core technology to support the functionality,” said Misra. “We’re developing a brand new product. We envisage that the development will just be the initial stage of the partnership.”