Why bigger can be better with FX options

Large notionals often trade at significantly tighter spreads than smaller ones. Simon Nursey at Digital Vega explains why

Shopping trolley and currency

When we examine aggregated bid-offer spreads for foreign exchange options for different notional sizes on the Digital Vega Medusa multi-bank aggregator, we see something rather peculiar – bid/offer spreads for very large notionals are significantly tighter than those for smaller notional options.

Common sense dictates that larger sizes should demand a liquidity premium to cover the increased cost of covering the risk. So, what could explain this effect?

Dealer intervention and auto-pricing


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