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Icor Derivatives Trading Opens for Business

Following the announcement of their joint venture in September, Reuters and Icor have now rolled out their first service, Icor Brokerage FX Options, in Asia-Pacific. The service is carried on the Reuters Dealing 3000 platform, and will initially support the Australian dollar market. Jeff Larsen, CEO of Icor Brokerage, says that the company plans to rollout USD/JPY and EUR/JPY trading on the platform this quarter. The company further plans to launch the service in Europe and then North America at end Q2.

Both Larsen and Ron Atkinson, director, Reuters relationship, feel that the current climate is ideal for rolling out the platform. Certainly it can be no harm to the product that a company that could have been seen as a rival, Volbroker, has been swallowed up into Icap to produce a hybrid offering. Both Atkinson and Larsen are keen to stress that the Icor offering is a pure online trading service, one they see increasing liquidity and efficiencies in the options market.

The move would seem to be an obvious one, considering that it is widely felt that where the FX market goes, FX derivatives inevitably follow. There are many in the market, however, who suggest that derivatives are such a complex product that only a very broad (and expensive) online offering could support such a market. The answer to this, in Icor’s eyes, is to keep the product simple, at least initially.

Larsen explains, “The system has been designed to support other asset classes; however, we want to ensure that we get everything right, and that means starting with the basic, vanilla options. Once the system is in place, and volumes are being traded, this will build its credibility, and we can then explore rolling out other products. Initially however, we want to get the volume levels up.”

In its first phase, the system supports calls, puts, straddles, strangles and risk reversals. The plan is to add more currencies before products; plans call for nine currency pairs to be supported by the end of 2002. Aside from the aforementioned three pairs; these may include EUR/USD, cable, NZD/USD, USD/CAD, USD/CHF and EUR/GBP.

The system has gone live with 14 users in Asia-Pacific, and Larsen says the early response has been “very good”. He adds the Asia-Pacific region was chosen because “in an area of massive regional distances and multiple languages, electronic trading is a natural and essential advance, and the Asia-Pacific banks are particularly receptive to online trading”.

The System

The central feature of the system is the ‘Market Action Table’ which shows all bids and offers in the market in the main tenors. A trader’s own orders are highlighted in white, those of other players in green, yellow or red. All participants are anonymous until the deal is transacted, clients then have the choice of either a 180-second credit check window, or they can make use of Icor’s LineMinder module. This function is similar to that in use in Reuters’ FX matching system Dealing 2000-2, in that a proportion of an institution’s credit lines can be incorporated into the Icor system. This allows for pre-credit checking, hence the different colour codings available. Green signals both sides of the party have room to trade, yellow signals one or both parties have to check credit, red signals a deal cannot be transacted due to credit constraints.

Also on the main window is a ‘Market Action Grid’ which enables users to drill down into the market and ascertain the stack in the various markets. The grid is a visual replication of the market action table. By clicking on a market, the stack appears in a separate window, users can then click anywhere on the stack to trade in their required amount.

Other functionality includes a facility for indicative pricing using the ABC feature (active but confirm). Larsen says this feature is of particular use in institutions that have junior traders using the system (before they transact the system will require a final check of the trade, thus reducing the chances of mis-trades). As is to be expected, the system also has a ‘suspend orders’ function which eliminates the need for a trader to re-enter all orders in the market once they have been pulled. It also has the ubiquitous ‘panic button’ which pulls all orders in the market.

What Icor terms ‘an industry-standard analytics package’ is provided with the system, as well as a separate window which shows volatilities, spot and forward rates. There is also a messaging window that indicates changes in the market and trades done. This function can also be used to negotiate elements of trades. The negotiation remains anonymous until a deal is complete, as well as to request a price.

Reuters provides a generic feed of spot and forward rates to assist in the setting of levels, Atkinson points out that these can also be negotiated in the messaging window. Regarding the prospects of adding full conversational functionality to the system, Atkinson acknowledges that this exists on the Dealing 3000 platform and that it is likely that the two products will inevitably move closer together.

The trade blotter function shows not only trades undertaken by the user, but all trades done on the system that day by all users. The system can be configured by preferences for one-click dealing and preferred maximum size.

High Hopes

Both parties are confident that the system’s positive reception signals a bright future. Larsen feels that the benefits to both small and large institutions will ensure a strong take up when it is rolled out in Europe and North America. “Larger players like it because of its anonymity,” he says, “Smaller players because it is very transparent. In effect, it levels the playing field in terms of market knowledge.”

Atkinson points to the straight-through processing (STP) benefits. Aside from the pre-trade credit checking functionality, each trade triggers an automatic email or fax confirmation. He adds that there can be multiple recipients of these confirmations. “The STP functionality reduces costs through greater efficiency,” he continues, “To which can be added that it is cheaper to trade on the system. There is no connection fee, merely a brokerage to pay. You only pay as you use the system.” The company adds that it does not plan to charge market makers during the introductory period.

Once the system is rolled out globally, Icor will start to look at the provision of online trading functionality for interest rate swaps and options, a feature Larsen expects to be live towards the end of 2002. The company will also continue to work on enhancing the product according to customer feedback and building volumes, he adds.

In spite of the mixed fortunes experienced by others who attempted to move derivatives trading online, Larsen is optimistic over the Icor system’s prospects. “The future of options trading and brokerage will be substantially online in our opinion,” he says, “It is a natural evolution, not just for vanilla products, but also more complex offerings.”

Profit & Loss

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