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Foreign Exchange

FX options e-trading review series: Tradeweb

EuromoneyFXNews reviews Tradeweb’s FX options matching platform, which was launched earlier this year and is the latest electronic platform to enter the multi-dealer FX derivatives space.

Tradeweb was created in 1998, pioneering electronic trading in the US treasury market for institutional clients. Since then, it has expanded into other asset classes, most recently developing a platform matching dealers with buy-side clients to trade FX options. Though the bulk of the liquidity in FX options continues to reside among the top banks’ single-dealer platforms, in the past 18 months a number of new entrants, such as Tradeweb, have entered the multi-dealer space in FX derivatives.

This has been in anticipation of impending Dodd-Frank regulation in the US and the Markets in Financial Instruments Directive (MiFID) in Europe that would require FX options to be traded on multi-bank platforms.

Tradeweb, which is 60% owned by Thomson Reuters, with the remaining 40% owned collectively by 10 investment banks, says it is ready to comply with the new rules as and when they are implemented. It recently registered as a multilateral trading facility, in accordance with MiFID, and has applied for swap execution facility status in the US.

Nine dealers have signed up to Tradeweb, with a further 10 said to be engaged in advanced talks, though Tradeweb said it was unable to disclose the names of the banks streaming prices on the platform. The main buy-side users are a mix of hedge funds, asset managers and banks.

Rules of engagement:

The client perspective:

At the request for quote point where clients launch an enquiry, they click on the dealers that they would like to see in that enquiry and the dealers know exactly who has requested the quote.

It’s not just “client ABC” – it has the client’s name on it. That means they don’t even have to reach the trading point to know who is engaged in the auction.

According to Tradeweb, the problem with non-disclosed e-platforms is that when it is anonymous, it increases the scope for gaming prices. It cites the example of the equity options market.

The market-makers’ perspective:

The full transparency allows dealers to tier prices according to the quality of the client. It allows dealers to refine the bid-offer spread according to their clients.

“Tradeweb allows dealers to establish strong relationships where you want them as a dealer,” says Tradeweb’s Adriano Pace. “For the client, it’s an aggregation of prices disseminated separately from single-dealer platforms, and it allows for proof of best execution. It’s very MiFID friendly, as it’s all there on one screen, rather than trying to source information from different venues.”

Enacting a trade :

Setting preferences:

It has a range of preferences, eg must trade on best quote – this system will prevent clients from trading unless it is the best.

Ticket settings:

A client can choose default currency pairs, default notional amount, cut-off time, hedging methods – delta hedged or live risk pricing – and number of decimals on notional. All these things have been created specifically for FX.

If you do delta hedge, that is where you have further population: what spot reference, what forward points, what quotation is being used – sterling; %, or dollar pips? Will the client settle the premium spot or forward? Will the delta hedge be spot or forward?

Security settings:

For clients, it’s a desktop application, with a very light internet, point-to-point connection that has IP recording and firewalls that prevent misuse. This is now defaulted to a client’s chosen settings, but can be easily changed.

Product range:

In addition to vanilla options, Tradeweb has built in a series of strategies, eg call spreads. Clients can create their own expiry date, choose strikes, notional amounts and cuts.

Negotiation phase:

Once the client has filled out the type of option they want to buy/sell, it brings them to a negotiation page. On the page is a summary of what has been asked for.

The dealer with the best bid/offer is highlighted in green, and the others in white. The vol is also highlighted. The maximum auction time to respond to the dealer is five minutes, and most dealers are able to stream real-time prices continuously during this period.

Last look to give confirmation from the dealer and API dealers will automatically confirm the trade.

When the trade has gone through, the other dealers see a message saying ended. At the end of the auction, the dealers that did not trade do not know if the client bought/sold/ended.

Post trade:

Once completed, the client can see a detail page giving a summary of the trades with a time stamp, information on the dealers and prices, user ID and information on the delta hedge if it was chosen.

A full transcript of the steps in the trade is also available: when did the dealer respond, price changes and messaging, etc?

The aim is to improve the workflow of the clients’ back office. CSV files with all the trade-flow information can be exported from Tradeweb to load into institutional clients’ back-office systems.

There is also an option of a summary blotter, with the information of each trade and the prices received. This information can be uploaded to Excel to analyse dealer behaviour over any given time period, allowing clients to see trading frequency with each dealer, percentage of auctions won, response times, and bid-offer spread information.

This can be categorized according to currency pair, to assess dealer’s respective strengths in each currency.

Clients can also request so-called “gold reports” from Tradeweb at the end of every month, summarizing trading activity, rather than clients having to manually get the information themselves.

Tradeweb can also provide best-execution reports. For example, if dealer X won the auction by half a basis point, Tradeweb could work out the price difference between the best dealer and the second best dealer, in cash terms, to see how much was saved by going to those two dealers, and picking the best dealer over the second in the auction.

Clearing:

Tradeweb is not yet connected to clearing houses, although it is ready to connect to central clearers when FX options are mandated to be centrally cleared.

Summary:

Tradeweb offers clients a broad range of dealers to choose from to ensure they receive the best possible price and gives both parties the security of a fully transparent trading platform for FX options.

Though competitors, such as Digital Vega, entered the market almost a year earlier, Tradeweb does not feel it has been left behind the pack.

“In terms of how many dealers we have signed up and the conversations we’ve had with them regarding volume of flow, we are pretty much on par with our competitors in this space,” says Pace.

Tradeweb says most of the biggest FX banks have signed up as dealers but for compliance reasons it is unable to detail which firms are on the platform.

Tradeweb has a varied client base, with a mix of hedge funds, asset managers and banks. Geographically, these clients come from all over Europe.

While the platform is not limited to European clients, it only operates during European trading hours. Pace concedes for FX this is very limiting, explaining that the platform will very soon be available during the US and Asian timezone, making it a 24-hour trading venue.

Users can trade FX options for all G10 currency pairs and, following client demand, Tradeweb says there are plans to expand into emerging market currencies later this year.

EuromoneyFXNews will publish similar reviews on other FX options e-trading platforms, including Digital Vega, SURFACExchange and SuperDerivatives.

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