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Goldman Sachs Puts Exotic Options Online

Goldman Sachs went live last month with an online exotic options trading service, a component available on its Internet-based WebET platform, says Zar Amrolia, global head of FX sales and e-commerce.

“American digital options are the building blocks for 90% of first generation structured products,” says Amrolia.”Not only can we use this to broaden our customer distribution for simpler products, but this is a step toward building many more structured products.”

American digital options (or one-touch options) are triggered if the market reaches a certain level at any time during the life of the option.

The in-house developed service boasts streaming, real-time tradable prices on American digital options. The first trades took place on 12 February with several continental European counterparties. Amrolia says that Goldman was expecting corporate interest to outweigh that of institutional investors, but demand has been strong from both camps.

In addition to the continental European counterparties, several non-market making banks in the US have also used the service. In the coming weeks, the product will next be extended to Asia.

The service went live with three currency pairs broadcasting – euro/dollar, euro/yen and dollar/yen. Amrolia anticipates another three pairs to be added shortly – cable, euro/Swiss and Aussie. Deal sizes average just under $1 million pay-offs, says Amrolia, adding that this is not unusual in the American digital market.

Exotic options are not currently widely available online, because of the complexities involved in pricing – which depends on many different parameters such as the spot and forward markets, at-the-money volatilities, as well as skews in the market (eg, risk reversals and vol surfaces).

UBS Warburg was the first to market with an Internet-based exotic options trading service, called I-DEALer, which operates on a request for quote (RFQ) basis. Accessible from UBS Warburg’s Investment Banking Online (IBOL) web portal, the tool delivers streaming dealable volatilities from its VolCast platform and offers clients embedded vanilla and exotic options pricing and integrated online execution. The service went live in Q1 2000 and now has 175 client institutions globally transacting over 1,000 instances daily.

“These innovations bring transparency to a market that is not traditionally a liquid market,” says Amrolia. “There are now tremendous opportunities for new product creation on both the traditional and exotic derivative sides. In 1992-93, barrier and digital options were exciting and new. Seven years later, we have put them on the Web. The pace of innovation will continue, as customer problems become more complicated and products become more tailored to meet specific risks.”

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