What is the rationale behind DV2.0?
As in all industries, business models and client demands are constantly evolving, in many cases, utilising new technologies to improve outcomes for both supplier and consumer. The FX market, specifically the smaller but more complex FX Options ecosystem is no different. Due primarily to its smaller size and much greater levels of complexity, electronification and automation of the FX Options market has understandably emulated but lagged the core cash markets.
Given Digital Vega’s unique focus on FX Options and its reputation as an innovator, it is now very close to launching the first fully electronic interdealer FX Option CLOB. This new service has been actively supported by all the major bank players as it will reduce transaction costs by up to 80%, will implement a maker/taker brokerage model, will fully support pricing of specific interests and will be the first of its kind in the industry.
A new and unique component of this service will be the ability of participants to bilaterally negotiate and fine tune execution on specific interests using the dedicated Specifics negotiation module. This negotiation process is limited to a small group of participants and is fully hidden, audited and provides automated transaction completion, trade generation and STP messaging.
Recent feedback from both buy- and sell-side users clearly demonstrates support for a negotiation capability to supplement the existing Bank to Client RFQ protocol.
We are aware that many larger, more sensitive transactions currently take place using chat functions, so decided that enriching the RFQ protocol with a similar secure, automated and audited negotiation capability may provide significant benefits to both buy- and sell-side users – like speed, ease of use, reduction of market impact and avoiding manual re-keying of transaction terms.
This negotiation logic has been fully tested and validated and will shortly be added to existing RFQ workflows on Medusa, our multidealer (MDP) platform. The Negotiation function is also ideally suited to managing the publishing and negotiation of bank Axes. Again, bank Axes have been historically distributed to potentially interested clients via voice sales or chat tools and the process is cumbersome, hugely manual and inefficient.
Digital Vega’s new Axe tool will provide a range of controls on distribution groups, time to live, and market sensitivity triggers. It will limit market impact, remain fully audited, and will automatically generate transaction ticket details and feed into STP channels.
We will also generate a regular, detailed report covering all elements of client to bank Axe activity.
How will the negotiation service work?
Currently, clients use Digital Vega’s TCA-based Liquidity Optimiser to identify their optimal Provider Panel, using the Medusa MDP to ask a defined group of LPs to quote for an FX Option trade. If quotes are provided but the client decides not to trade based on the target rate not being achieved that is currently the end of the process.
With DV2.0 the RFQ process does not end there. It continues, with the client and best LP(s) negotiating in a private room to reduce information leakage. If the target rate can be agreed it is a simple click and trade, with the normal STP process followed.
Does price negotiation happen now?
Some clients do this now, but it happens using Chat which requires high levels of manual intervention and often falls outside compliance requirements.
What are the benefits of this new negotiation?
DV2.0 maximises FX Options liquidity, minimises trading footprint and automates large parts of the trade, meaning no re-keying and automatic STP. Importantly this moves negotiation away from Chat and onto Digital Vega’s regulated platforms. This provides a full audit trail from the initial RFQ to the final negotiated price.
It also allows LPs to capture more trading volume and clients to achieve their target rate more often.
Why did you introduce Axe management as part of DV2.0?
Recent discussions with key clients and LPs highlighted growing interest in automating Axe management, publication and execution protocols. We are now developing a full Axe management solution for the industry.
How will this work?
Axes are a good way for larger amounts to be executed and using DV2.0, participants will have the ability to publish a range of Axes to select clients or client groups automatically.
Why are you introducing this service now?
Firstly, advanced negotiation and Axe management have been identified as key requirements by both buy- and sell-side firms to make FX Options trading workflows faster and more efficient.
Secondly, we have all the technology available already. We have our RFQ platform Medusa which has been operating for many years, and now also have the new technologies which will provide the advanced negotiation and Axe management capabilities.
And finally, now your CLOB has been built when will it go live?
We are in the process of connecting firms and hope to go live this summer. We have waited because we are convinced that when we go live there must be good liquidity from day one. We now have a growing list of firms that are connected and ready.
It took us 18 months to build the CLOB, but getting major bank API’s integrated has been a challenge due to the compliance, legal and surveillance requirements imposed on the banking community as a whole. We have also opted to wait until we have a rich seam of continuous bank liquidity before pressing the “live trading” button.