Digital Vega is continuing to ramp up its business ahead of a series of new launches this year with the hire of Rob Wemyss as a non-executive director and head of business development.
Wemyss, who joins after 25 years with JP Morgan where he was global head of FX options, is the latest in a string of hires by Digital Vega over the past 12 months.
In February 2019, the firm hired Simon Lewis as head of interdealer solutions and Romain Camus as head of exotic options and then — after raising additional funding in June — it added Asa Attwell as head of product development, Laura Winkler as EMEA relationship manager and Simon Nursey as head of Asia in October.
Mark Suter, executive chairman and co-founder of Digital Vega, tells Profit & Loss that there will be more hires to come.
“Our aspiration is to be truly global and so I think that there will be more hires in Asia, and we’re actually talking to a couple of potential candidates in Singapore already. In addition, we’re waiting for ESMA and the CFTC to approve SEF equivalence, and once that happens we plan to open an office in the US,” he says.
Part of the reason why Suter is building out the Digital Vega team is to support the planned upcoming launches of automated expiries, exotic FX options and a central limit order book (CLOB) later this year.
“We ran a pilot for the automated expiries a few months ago and the feedback we got from it was very positive. As we do more and more business with active systematic funds, expiries have increasingly become a bottleneck. When they first launched, electronic platforms enabled firms to do a lot more spot FX business in a clean, efficient manner, and the same is true with options until you hit this bottleneck of expiries. So hopefully this project will remove that issue,” he says.
Suter continues: “For the exotics, the front-end and back-end are built and we’re now in the process of connecting to bank APIs. So we should have a full working demo version ready in about six weeks and a production demo ready by the end of Q1. The CLOB is going to take a little bit longer because there’s still APIs that people need to connect to, we’re hoping for a May launch. One of the great things about these new hires is that we’ve got a lot of different work streams running in parallel right now.”
Building Out Liquidity
When building out a CLOB, one of the challenges for platform providers is typically a “chicken and egg” one in that they only really offer value to market participants once there is a decent amount of liquidity already on there. To solve for this, Suter says that Digital Vega will operate a maker/taker model for its CLOB, meaning that firms will be paid to place liquidity in the order book. He says that the firm currently has six market makers that are committed to putting prices on the platform at launch.
“Over the last two or three years, the comments that kept coming back to us over and over again are that people want to improve efficiency and reduce their costs. The big banks have told us that the cost of trading between themselves via voice brokers is hugely expensive, it’s getting less and less efficient and it’s under closer regulatory scrutiny. This is why they want to be able to execute cleanly and efficiently, which is why we’re building a fully electronic vol-based central limit order book, which will offer fair pricing and generate a really rich new seam of market data,” adds Suter.
He also emphasises that the recent hires are also to help expand Digital Vega’s offering beyond FX options pricing.
“We are very close to completing a full suite of exotic pricing and execution tools, but it’s not just about pricing. What we’re aiming to do is deliver single-dealer functionality over a multi-dealer platform, so the emphasis is on structuring, sharing ideas, analytics reporting, the market data feed and then using all this to improve users’ execution capabilities,” he says.
To this end, Suter claims that Digital Vega already has a unique set of market data based on the activity that it already sees on its platform, and that as volumes continue to grow, this data will become further enriched. Therefore, he ultimately sees the potential to offer tools such as pre-trade TCA for FX options derived from this data.
Shifting to Multi-Dealer Platforms
Based on his experience in the banking sector, Wemyss is confident that more FX options will move to multi-dealer channels, explaining that this is part of what drove his decision to join Digital Vega.
“There’s been a big push over the past five or six years to provide an electronic solution to clients for trading FX derivatives. Before 2013 I would estimate that 95% or more of the volumes conducted by banks to clients was done through the sales desk or direct between traders and clients, but it was all voice trading. Then there was a push from clients to provide a more efficient service for executing these trades and so the banks started to offer trading on these products via their single-dealer platforms and as a result, trading volumes exponentially increased between 2014 and 2018/19. Now the next stage on from this is that there’s a growing demand amongst clients for an aggregated solution,” he explains.
One driver of this, according to Wemyss, is that clients want to be able to demonstrate that they achieved best execution when trading FX options. Whilst they could have several single-dealer platforms open on their desktop and check the prices across each, he says that it is easier and more efficient for them to be able to look at different prices in one place, hence why there is this impetus for a multi-dealer solution.
“The FX options market has been slow to adopt a multi-dealer solution, however that is changing and I fully expect the proportion of electronic volume currently traded on bank single-dealer platforms to start migrating towards a multi-dealer outcome. There’s no doubt in my mind that this is where the endgame is,” says Wemyss.
He estimates that currently 90-95% of electronic FX options trading takes place on single–dealer channels, with just 5-10% taking place via multi-dealer platforms. However, Wemyss adds that he fully expects this to “right size” to around 65-75% executing via single-dealer platforms and 30-35% via multi-dealer platforms in the next couple of years.
Looking ahead, Suter insists that Digital Vega has “only just scratched the surface” when it comes to offering solutions for firms trading FX options, adding that ultimately, he sees the potential to expand into other asset classes.
“We want to become much more involved in the wealth management space, hence the focus on exotics. Obviously FX is a big asset class for wealth managers, but equities is too and so that’s something that we may want to look at a little further down the road,” he says.