Last month’s launch of Volbroker.com, the new online marketplace for currency options, promises to bring down the barriers to entry in this specialist market. The joint venture company was set up by six partner banks ‘ Citibank, Deutsche Bank, Goldman Sachs, JP Morgan, Royal Bank of Scotland and UBS Warburg ‘ which began live trading in late August.
Volbroker is headed by CEO Dirk Ward (formerly chief technology officer for Deutsche’s Global Markets E-Commerce group), and chief marketing officer, Bronia Jenkins (formerly Global co-head FX Options at UBS Warburg). The e-brokerage operates a 24-hour service from an office in London, which is staffed with about 15 traders and brokers.
Ward says the system was designed to be as open as possible, so even smaller tier banks can reach a level of confidence that will translate into increased usage of currency options. This, coupled with automated pricing and execution, means the service eliminates some of the key barriers to entry for second and third tier players.
Volbroker is operating via a private network in order to guarantee near real-time response times and allay security concerns, says Ward, but will add an Internet capability six to 18 months down the line.
In addition to automated execution, pricing tools, value analysis and middle office functionality, Volbroker has a direct download feature that links into deal capture systems to provide straight-through processing (STP).
The partners guarantee liquidity in 13 currency pairs (including the majors, some euro crosses and the Commonwealth currencies) in both at-the-money and specific interest options. Further releases of the service, due at the end of the year, will include exotic options and emerging market currencies.
The dealing screen has live rate feeds from the six partner banks, showing spot, forward and deposit rates. The top and bottom rates made by the six partners are extracted, averaging four prices at any given time.
The screen is flexible, so users can configure a variety of views, as well as a number of control functions covering pricing, limits and amounts. Contract details can be obtained with a single mouse click, accessing expiry and delivery dates, strike and spot reference rates. A right click gives users a view on the full depth of the market, as well as where they stand in the pricing queue.
After a live testing period in London among the six partner banks, or the “dream beta team” as Ward calls them, Volbroker was extended to 15 of the largest banks in London. The launch will be followed by a similar rollout in New York this month (September), before going live in Asia.
Within the next few months, Ward says three additions will be made to the service. The first is the ability to surface trade automatically without human involvement. The second is semi-automated pricing, whereby Volbroker will generate prices based on pre-determined criteria. Thirdly is a direct dealing function similar to the Reuters conversational service so traders can contact each other directly.
Volbroker.com offers the same features available in the traditional voice brokered market, but will offer automated execution, greater transparency, and access to a centralised liquidity pool, Jenkins points out.
Since Volbroker competes directly with the traditional voice brokered market, the obvious question is why the brokers haven’t initiated such a service themselves. “This may be because the banks are so much better resourced than the brokers. We have had a tremendous amount of support from the banks on legal and credit issues, as well as on the infrastructure side,” says Ward.
Meanwhile, the Fenics.com venture, which provides FX options pricing, volatilities and analysis over the Internet, is not viewed as a competitive threat to Volbroker at this juncture, because the latter is a B2B portal, while Fenics.com is B2C, aimed at corporates, smaller banks and financial institutions. The partnership with Fenics Software includes ABN Amro, Bank of America, Credit Suisse First Boston, Dresdner Kleinwort Benson, Lehman Brothers, Société Générale and UBS Warburg, and launched 10 July.