BGC: electronic price streaming in options is gathering pace

While concerns about liquidity conditions have surfaced across all contracts in foreign exchange, options markets and complex products have been particularly hard hit as banks try to minimise the balance sheet impact of the trades they warehouse.

"We are working with a number of banks that are streaming prices to us electronically. As recently as a few years ago, banks did not provide prices electronically in the over-the-counter options space. Currently, we are working with banks to advance the electronic process via our platform, BGC Forex," says Danny LaVecchia, executive managing director, North America, at BGC, the winner in the Best Broker for Currency Options category at the 2016 FX Week Best Banks Awards.

More electronification in the space means more liquidity, but the degree of variability across currency pairs and the resulting complexity means the process of electronic evolution is considerably slower than in other, less complex contracts.

Increasing volatility has been illustrated by the move in the British pound, which due to Brexit has moved more violently than anything I have ever seen in my entire career
Danny LaVecchia, BGC

"Volatility has been low, which has led to lower volumes. Increasing volatility has been illustrated by the move in the British pound, which due to Brexit has moved more violently than anything I have ever seen in my entire career," LaVecchia says.

"Now, given the outcome of the US election, volatility is likely to increase once again. At any given second of any given day, there are anywhere between 50–300 different possibilities in terms of EUR/USD options, which could go out as far as 30 years, with different time and structures, etc. When you take into account this degree of variability across all currency pairs, the complexity is staggering," he adds.

Alternative clearing

While market participants are not obliged to clear options under current regulatory requirements, rising capital costs for market-makers and, as a result, end-customers has led to increased efforts to explore alternative clearing solutions.

"The question of who clears the product is also important because while, until now, banks have been the predominant clearers, a move towards central clearing could introduce new market participants into the space and in turn boost volumes. Once the market turns to clearing, the characteristics of the flow will change dramatically," he says. "But a move to clearing is a steep step to take and this will be a longer-term, multi-year process."

Technology upgrade

This year, BGC has been busy making sure its systems and technology are up to the task of operating in a rapidly evolving marketplace. This year, the broker deployed its upgraded platform, BGC Forex, which is able to quote the full range of contracts in the options universe electronically.

"The technology upgrade has helped us get to where we are today, and we will continue to roll out new services and products throughout 2016 and 2017. Until now, our electronic quoting capabilities extended only to vanilla options structures. However, we now cover the full range of options," says LaVecchia.

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