FX Options multi-dealer platform provider Digital Vega has rolled out a new exotics platform as it seeks to eat into the dominant share of this market held by the bank single dealer platform.
To date, developments in the FX options multi-dealer world have been limited to vanilla products, such as those supported by Digital Vega’s Medusa platform, however the firm has now unveiled Hydra Exotics, a new structuring and sales-to-trading platform that allows users to price, share, risk manage and value portfolios of complex options.
Built by Digital Vega, the platform very much has the look and feel of a single dealer platform – thus providing a degree of familiarity for users accustomed to working on those venues, and the single dealer platform world is very much the target of this new launch. “We are trying to break the last bastion of the single dealer platforms – FX options,” says Simon Nursey, head of Asia-Pacific for Digital Vega. “These platforms have been successful because of the rich functionality available that previously wasn’t in the multi-dealer space – Hydra changes all that by not only matching the functionality but by being faster and able to handle portfolios with multiple clients and liquidity providers.”
Although speed in terms of trading is still largely irrelevant in FX options markets, when it comes to workflow efficiency it can save valuable time and with most single dealer platforms having FX options down their list of products to migrate to the new HTML5 environment there is a sense that Digital Vega has an opportunity window with its new platform. As Mark Suter, founder and CEO of Digital Vega reveals, “We benchmarked the new platform against a single dealer platform and our proprietary pricing was very close but it was much faster – something like 0.5 seconds to price a multi-leg accumulator, compared to more than 30 seconds on the SDP. That is a serious efficiency gain, especially when trying to optimize a structure or solve for strike, and there is the competitive advantage of presenting ‘on-the-spot’ a price to the customer in a busy environment.
“We think our differentiator as a firm is the expertise and experience brought by our people, all of whom have been market practitioners,” Suter adds. “By using new technologies, we have created Hydra to deliver single dealer functionality via a secure browser – there is no download – in a competitive environment.”
Nursey points to the private banking industry as one potentially rich seam for Hydra. “The whole workflow efficiency, the way users can create, save and share ideas and then have them priced competitively, appeals to this segment,” he says. “Private banks are becoming more aware of their best execution requirements, especially in Asia, and it’s hard to demonstrate best execution in a single dealer environment efficiently – it can be onerous and time consuming. Hydra, for this reason alone, will become a very valuable product for these users.
“The creep of regulation also means that more end clients are looking for a solution away from the single dealer platforms, especially when trading products like TARFs,” he adds.
The platform supports a wide range of exotic options products in the barrier, digital and touch, and complex buckets and while Nursey says that all the products required by someone trading structured products are available, “adding new products is very easy”. He adds that while at the more exotic end of the spectrum users may prefer to execute in a non-aggregated liquidity pool, “the functionality is there is they want to use it”.
Creating structures is easy thanks to the intuitive design – simply click on the product type, select the currency pair and play with the structure as you see fit. Barriers can be added and fields can be “solved for”, details of individual legs can also be altered as can the schedule which can be stepped up or down. By saving the strategy it is then available in a strategies blotter to share with colleagues or to further change the structure. Users are able to compare multiple analyses and view the structure through aspects such as by vega bucket, gamma and cashflow – they are also able to run ‘what if?’ scenario analysis based upon spot movements.
Tapping into the aforementioned expertise in the company, initial pricing is indicative from Digital Vega using the Vol surface from Medusa. “We incorporate event weights into the surface, which is an advantage of having access to so much RFQ data,” explains Nursey. “We think we are in a unique position to create a very accurate rate.”
Once the structure is shared, discussed and agreed with the client or within the client team, the account or prime broker is selected and it is sent to RFQ. The screen then shows the Digital Vega indicative price, along with the dealable prices from the panel of LPs with top of book highlighted. Nursey says users access five prices for any given trade request and can hit down the stack on an individual basis – if for example trading with a certain counterparty would offer regulatory cost advantages – however users are not allowed to sweep the book. An unwind price can also be requested for structured forwards.
It is a simple click-to-trade mechanism from there and Digital Vega has full STP in place for the post-trade. Once traded the deal enters the blotter, from where users are able to do the full range of risk analysis on either single trades or a portfolio of trades. “Clients can also upload all trades across counterparties for wider portfolio analysis, this can be sent to one of our panel of LPs for analysis and advice if necessary – naturally we take out actual counterparty names,” explains Nursey.
Hydra also has a plug-in available to quantify one’s credit risk in real-time, factoring in client credit curves and CSA details. It produces economic CVA (credit valuation adjustment), detailed PFE (potential future exposure) and its maximum along the life of the portfolio, ‘This is helpful for agency-type operations,” observes Nursey. “A lot of firms run their derivatives business on a margin style basis, with Hydra, instead of assuming an overly conservative 10% notional margin, they can do proper credit calculations.”
Looking ahead, Suter says Digital Vega is working on creating a white label solution of Hydra, “We will also add auto-expiries to remove another bottleneck.”
Whatever the firm develops, however, he is keen to ensure Hydra remains easy to navigate. “We want to look and feel to remain as clean as possible, clients don’t want to have to process too many numbers on a screen, which is why Hydra has been built in a modular fashion,” he explains. “Effectively users start with a blank screen and build their own exotic FX options trading platform.”