(Bloomberg) — IMC Trading is set to start dealing in currency options this month to capitalize on soaring demand at a time of geopolitical and macroeconomic uncertainty.
The Dutch electronic trading firm, which has its roots in equity derivatives, will begin with vanilla options on Group-of-10 currencies, said Ramon Puyane, its head of FX trading, in an interview. The firm will initially focus on short-dated contracts — bets or hedges on moves from one day to the next three months — which are the most liquid in the $7.5 trillion-a-day global currency market.
Demand for such options is being fueled as investors keep flip-flopping on the policy outlook for major central banks. Bank of England figures show average daily volumes surging by more than a third within six months to $236 billion in April. Yet IMC is trying to break into a market where 12 banks control over 96% of it.
“There’s been a big change in the macro landscape and suddenly people see FX options as interesting again,” said London-based Puyane. “Customer demand is increasing every year but there’s a reduction in liquidity coming from the banks.”
IMC’s planned foray follows a trend of non-bank market makers increasing their sway across asset classes, as tech-based trading models enable them to transact at lightening fast speeds and more easily harbor risk than regulation-laden banks. Spot currency markets have already been flooded by electronic trading firms such as XTX and Citadel Securities, which have grown to become some of the biggest liquidity providers.
“One of the issues is that since the financial crisis, a lot of market makers either disappeared, scaled back or just moved away from FX in general,” Puyane said. “Pre-financial crisis, banks were taking a lot more risk, but now the liquidity has kind of dried up.”
Puyane, formerly the global head of FX exotic derivatives at UBS Group AG, joined IMC in April to drive the push into currency options. He hired Patrick La Fontaine, also an FX options trader at UBS, while two of IMC’s existing stocks traders have been reassigned to the new team.
“We’ll start with G-10, that’s the most transparent, nothing is easy but it’s a little bit more forgiving to get involved in,” he said. Once established there, he said they will “be able to have conversations and ask where liquidity is lacking.”
So far currency options have lagged the technological advancement seen in the spot market because the products are more complex, less standardized and the overall market is smaller. While that means there is still some need for old-style voice trading given many prices are still constructed manually, options trading is now moving toward electronic channels, driven by demand for greater efficiency.
IMC will be competing with fellow Dutch firm Optiver, which has been active in the FX options market since 2017 in the dealer-to-dealer space. Initially, IMC will also start trading in this part of the market, before trying to move closer to dealing directly with the buy side in the first half of next year, Puyane said, adding that banks have so far been receptive to the launch.
“We’re not the first to enter the market, they realize that we’re actually additive and not necessarily the threat that they might have thought we were five years ago,” he said. “The market is better when there are more more market makers.”
–With assistance from Gina Turner.
(Updates to add quote in final paragraph, photograph of Puyane.)
©2024 Bloomberg L.P.
