Exploring the benefits of White Labelled electronic FX option platforms

Exploring the benefits of White Labelled electronic FX option platforms

The FX market is a highly diverse place, with institutions trading multiple assets of varying complexities. FX options typically do not account for the heaviest trading volumes but are a significant part of any firm's trading operations. The Bank of International Settlement's 2019 Triennial survey noted that FX options trading volumes were valued at $219 billion daily during that year.

While this number pales in comparison to outright forwards volumes, it is greater than the volumes in currency swaps. Options trading strategies can get complicated in a hurry and most firms used to view heavy technological investment as a negative ROI proposition.

However, thanks to changing regulations causing banks to reevaluate their costs and increase efficiency, FX options technology adoption is increasing, particularly white-labeled solutions. These platforms allow firms to instantly upgrade their current infrastructure and customize the platform according to their needs.

“FX Options are one of the last remaining FX instruments that are highly profitable yet not fully automated,” says Ludovic Blanquet, Chief Product and Strategic Planning Officer at smartTrade. “Banks would love to keep this flow in-house. Also,” he continues, “MDPs and other multi-market maker platforms have yet to offer a credible alternative to the mix of automation and advice that White Label solutions offer.”

So just how effective are these white label solutions and are they worth the investment?

A wide range of benefits

Perhaps the best place to begin looking at white label FX options platforms is the benefits they bring to the table. Regulatory changes have left a considerable impact on firms' trading workflows, causing them to minimize costs due to increased compliance infrastructure. The only way to adhere to new regulations is to increase electronification. The common view is the benefits that electronification brings to other lines of business will undoubtedly spread to options workflows too.

While they aren't regulations, recent changes to the GFXC's Global Code have placed the onus on firms to justify every trading decision they make. Given the complexities involved in the average options trade workflow, the best method of capturing an audit trail is an electronic solution. Thus, justifying trade and risk decisions becomes simple, since every action is automatically documented.

Mark Suter, Executive Chairman and Founder of Digital Vega, believes the hurdles of in-house infrastructure management might be problematic for firms to overcome, and white label options are an all-encompassing and cost-effective solution. “Running a fully fledged FX option service for clients requires a huge initial investment and significant ongoing running costs,” he says. “Such technology is very expensive to develop internally and experienced development resources are rare and expensive.”

Another benefit that white label solutions bring is the ability to offer an instant technological and infrastructure upgrade. Firms can get started with best-in-class execution and analytics out of the box. This saves them from having to invest in expensive infrastructure and maintenance.

Leveraging third party expertise also gives firms insight into industry best practices and updates, something that would be expensive and resource-intensive to implement in-house. Solutions such as smartTrade's white-labeled platform offer proven technology at low latency along with colocated services. As Blanquet puts it, “Trading with a large, well-established white label platform gives you the confidence that the risks are understood and managed. If things turn sour, you will be supported.”

Typically, these solutions come bundled with highly customizable user interfaces and integrate with existing infrastructure via fix and ReST APIs. The result is a seamless trading experience and quick onboarding times for FX options traders.


Core functionality

The core functionality of white-labeled FX options platforms aligns with what market participants desire in their trading workflows. For instance, smartTrade's solution for FX options features aggregated liquidity pools across asset classes as a part of their broader trading solution. “In addition,” says Blanquet, “we also offer connectivity to multiple LPs, aggregated or not prices in Premium, Delta and a long list of options types being offered. All of these are complemented by a roadmap for future enhancements.”

Most white label solutions also feature advanced analytics that allows firms to track patterns and keep tabs on correlations in their trading workflows. Metrics such as market depth, slippage ratios, holding times by venue, fill probabilities, rejection rates, and trade times bring deep insight into trading operations. Not only do they improve execution, but they could also potentially power new trading strategies.

The GFXC's recent guidance regarding the implementation of TCA in trading workflows and the importance of rejection rates during last look windows has meant sell-side firms need analytics backup to justify performance. White label platform analytics allow them to meet these standards easily and build transparency in operations. In turn, this strengthens relationships with the buy-side as well.

Digital Vega’s Suter highlights detailed reporting and audit trails as just one important pillar of a great white label platform. “A significant breadth of product, from vanilla structures, structured products, and first generation options, is something firms should expect out-of-the-box,” he says. “Sophisticated routing rules, mark-up automation, real-time limit and exposure monitoring, and deep aggregated liquidity are some of the other core functionality that should come as standard.”

Buy-side firms tend to use a range of execution management systems such as post-trade STP, credit, risk, and OM systems. White label FX option solutions integrate with these systems easily and firms experience almost no disruption in their regular trading flows. As previously highlighted, these integrations occur thanks to ReST and Standard Fix APIs.

Despite featuring many out-of-the-box solutions and functionality, white-label platforms are anything but rigid. In no particular order, Suter highlights the multiple ways in which Digital Vega’s platform can be customized. “Our end user trading interface is highly customizable, along with end user risk management, analytics, and reporting tools.” He also points out that their solution will ultimately be mobile-friendly.

“Clients can also automate liquidity optimization,” he continues, “House and client price formation are also standard features we offer.”

Highly customizable user interfaces allow firms to maintain the same look and feel throughout their trading systems. This might seem like a minor point, but maintaining interface consistency throughout asset classes reduces instances of manual errors. It also reduces the time it takes for traders to get up to speed with the new system.

Customization extends beyond the UI to the inner workings of the system. For instance, sell-side firms can help firms create, manage, and distribute prices via multiple channels. They can also create custom liquidity profiles for groups of clients, apply tiers, and distribute via white-labeled HTML5 portals.

The risk management modules on these platforms can be configured to include firm-specific hedging rules, despite offering a wide range of out-of-the-box auto-hedging rules. Thus, risk management and credit monitoring become simple. Firms can define flow-based rules to obtain full control over the execution process.

“Technology has become so versatile and agile nowadays that we can offer workflows and enhancements to tailor the platform each customer’s needs,” says smartTrade’s Blanquet. “Customisation is therefore open to the extent that the bank can price the instruments and integrate it with its existing post-trade solution.”

The result is lower costs from firms using white-labeled platforms thanks to increased trading efficiency obtained via powerful analytics. Firms can also save money due to not having to maintain costly infrastructure or personnel in-house. By leveraging third-party expertise, they can offer tailored solutions to their clients while maintaining brand positioning and custom UIs.


Choosing the right provider

As with any technological choice, the right service provider makes all the difference. Operating license models tend to be flexible. Suter mentions that they tend to vary from pure license fees, to revenue share, or a combination of both. Good service providers tend to have proven and reliable technology that has been battle-tested. For instance, service providers who release constant updates and disrupt operations are unreliable because their internal code lacks agility.

Good service providers also understand their clients' needs deeply. These days, cost optimization is a major issue in the institutional markets. A good service provider understands important points in trade workflows that lend themselves to optimization. For instance, TCA can be a difference-make for both buy and sell-sides thanks to analytics highlighting execution trends.

They also bring greater transparency to the market. Given the complexity that the average FX option workflow has, a good white label service provider will back their offerings with a robust analytics suite. Technological ability also plays an important role since most firms will need their solutions to integrate with legacy infrastructure.

One of the best ways to get a feel for a service provider's abilities is to examine their reputation and behaviour during periods of extreme market volatility. These moments stress-test platforms. An ideal service provider is both flexible and offers a solid foundation on which to build improved workflows.

One of the most important issues facing firms when adopting white label solutions is determining the time it takes to get their traders on board and up to speed. The best service providers are upfront about onboarding times and offer a good degree of customization and training.

“The majority of work stems from the lack of automation or real-time ability surrounding options trading, specifically post-trade integration,” says Blanquet. “We’re noticing more new entrants coming from other asset classes who tend to under deliver because of their mis-understanding of the FX market’s idiosyncrasies.” He points out that firms need to look for providers with a track record of delivering, a stable financial profile and a clear roadmap focused on the FX asset Classes.

“smartTrade is committed to empower Financial Institutions with intelligent trading platforms. Our recent combination with TickTrade is further proof that we understand FX and see a bright future in this space,” he says.

How will solutions evolve?

Technology is rapidly improving and there's no doubt that the current state of the market will evolve soon. Currently, features available on white label platforms are being distributed to firms with considerable resources, but this might change soon. Technological improvement has generally democratized access and this should be the case with the FX options market too.

Suter points to exotics as an area where new functionality is in the works. “ Digital Vega will shortly roll out a full version of the platform,” he says, “that will support both 1st gen and some structured products as a rebrandable, white label solution.”

The market itself will dictate how white label solutions evolve. For instance, the increased use of exotic options with custom payment structures and unique expiration dates and strike prices will dictate the next iteration of features service providers will integrate on their platforms. Automation is rising everywhere in the market and FX options should be no exception.

For instance, constructing options structures that minimize risk based on market liquidity levels and projecting trade outcomes based on probabilities lends itself well to algorithmic automation. Currently, all white label platforms allow firms to connect to their preferred algo providers and as their usage increases, we might see interesting developments in this regard.

For instance, algo options usage might rise along with trading strategies based on actionable volatility spreads. As the options market continues to mature, technology is both driving changes and evolving because of them. As such the ceiling for innovation is high and the future promises many exciting developments.

Blanquet hopes the market will eventually turn from a voice-based to an electronic one. “We need to expand the instrument coverage and the convenience to trade complex instruments. Here AI and natural Language recognition tools will help to turn the voice business into a digital one!”


This article was researched and written by eForex - Vivek Shankar