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Foreign Exchange

Inside FXMarketData: hedge fund flows provide the edge

Euromoney surveyed the FX options market for the first time in 2011 as part of the annual FX survey. Deutsche Bank (with a 17.32% market share) showed itself to be a powerhouse in this market, as it has been in the spot and forward markets for the past seven years.

Making an historical comparison on the shift in options market share is a difficult exercise given that 2011 was the inaugural survey. Nonetheless, this year’s volume data does reveal some interesting similarities and disparities between the structure and composition of the options market and that of the wider FX market. For instance, when options volumes are cross-referenced with overall market share, volume concentration among the leading option players looks very similar. The top five banks account for about 53% of the total market share, and the top three about 36.6%.

Options market share 2011
market share %
1 Deutsche Bank 17.32%
2 Goldman Sachs 10.31%
3 Credit Suisse 9.00%
4 Barclays Capital 8.99%
5 UBS 7.44%
6 RBS 6.70%
7 JPMorgan 6.42%
8 HSBC 6.15%
9 Citi 5.24%
10 Morgan Stanley 5.00%

Market making beyond the top 10 banks is clearly less prevalent, however. The top 10 option market makers hold 83% of market share, versus 77% for the overall FX market. This suggests that fewer banks these days are prepared to make the investment in a fully fledged options franchise.  

Option market share 2011 - Leveraged accounts
market share %
1 Deutsche Bank 16.06%
2 Credit Suisse 10.50%
3 Goldman Sachs 10.16%
4 Barclays Capital 8.54%
5 RBS 7.15%

“Over the past decade, there has definitely been a reduction in active market makers, and some have become takers of liquidity rather than providers,” David Wayne, Deutsche Bank’s global head of FX derivatives, tells euromoneyFXNews. Given the need to warehouse market risk for a longer period for options, the appetite for and cost of capital have discouraged some smaller banks from being active market makers, he adds. While many of the leading foreign-exchange banks say a strong options business is an essential element of being a top FX franchise, the results from the Euromoney options survey prove that this isn’t linear. Deutsche’s closest competitors were Goldman Sachs, with a 10.3% share, and Credit Suisse with 9%. Both banks ranked less favourably in the overall survey, being placed ninth and eighth, respectively. Meanwhile, Barclays Capital, which has risen from fifth to second in the overall rankings in the past four years, was in fourth place for options, albeit just 0.01% behind Credit Suisse.

Client mix

This disparity in market positions between spot/forward trading and options is best explained by the differences in the client mix of many of the top 10 options banks: that is, the amount of business that each does with leveraged funds, which make up 63% of total volume traded, with bank customers being the next biggest sector, making up 24% of turnover. By comparison, leveraged accounts make up 22% of total FX market volume, and banks 38%.

Option market share 2011 - Bank accounts
market share%
1 Deutsche Bank 21.30%
2 Goldman Sachs 12.53%
3 UBS 10.31%
4 Barclays Capital 9.40%
5 Credit Suisse 8.10%

“Hedge funds dominate the options space, so if you’ve got strong relationships with the hedge-fund and macro-institutional clients, like we do, you can out-perform in the derivatives ranking,” says Simon Hards, global head of FX options at Credit Suisse. Indeed, Credit Suisse ranked second in market share among leveraged accounts in this inaugural options survey, with a market share of 10.5%, closely followed by Goldman Sachs with 10.16%. Deutsche Bank topped the list with a 16% share.

While Credit Suisse and Goldman may be two of the preferred counterparties for hedge funds in options, that hasn’t translated into their overall leveraged-customer market share across all products. In fact, they both fell one place in the overall rankings with leveraged accounts, ranking seventh and eighth respectively in this year’s survey, despite recording higher trading volumes. Goldman Sachs declined to speak to euromoneyFXNews.

Deutsche Bank, however, dominates all of the major client categories, with its biggest market share being in the bank sector, 21.3%, based on about half the volume that it traded with leveraged clients. Its closest rival with bank clients was Goldman, with a 12.5% market share. By comparison, Credit Suisse sits in fifth position. For non-financial corporates, Deutsche also led the way with a 13% share of the market, though its lead here was the thinnest of all the sectors, 1.5% ahead of HSBC. Corporate customers make up just 6% of total option market turnover versus 12.3% for the overall survey.

“We cater to a very broad range of customers, so we don’t just have one area of specialisation. We specialise in everything,” says Wayne, who was promoted to become global head of FX derivatives at Deutsche Bank in 2010.

Option market share 2011 Real money accounts
market share%
1 Deutsche Bank 19.65%
2 RBS 11.58%
3 Barclays Capital 11.41%
4 Goldman Sachs 10.89%
5 UBS 10.48%

For Barclays Capital, the transition from voice trading to electronic trading in the options market, via its BARX platform, has improved its position to almost third-equal with Credit Suisse. Its market positioning across the client segments is broadly spread, being ranked third with banks, fourth with leveraged funds and real-money clients, and sixth with non-financial corporates.

“Three years ago, we were probably outside the top five in options. Since then, our business has been a work in progress and I think the team has done really well,” says Mike Bagguley, global head of FX trading at Barclays.

While electronic option trading volume has grown, it’s still small compared with spot, which isn’t surprising given the less homogenous nature of the market. “Electronic option pricing is important – as in the early days of e-spot trading. A client may not always trade electronically, but they like to see the pricing screens, and then they may phone up. It’s a very important tool for price transparency and the ability to trade with confidence,” Bagguley argues.

Price transparency will become even more prevalent as options move onto central counterparty clearing platforms and execution onto swap execution facilities (SEFs), in 2012. Some option trading heads say that’s likely to mean further concentration in market share, as increased costs in technology for electronic execution, clearing and trade reporting discourage investment from smaller market makers.

“These higher costs will be better shouldered by banks with higher market share and more efficient systems, and banks outside the top 15 may struggle to compete in the same league any more,” says Credit Suisse’s Hards.

Option market share 2011 non-financial corporates
market share%
1 Deustche Bank 13.02%
2 HSBC 11.53%
3 Citi 8.66%
4 Societe Generale 6.87%
5 UBS 5.91%

Data source:

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