Sunday, January 15, 2012

spot ^ fx-options -- 2 "extreme" segments of FX market

Within the FX space, I get the impression that the trend of open standard, transparency, inter-connectedness, commoditization, shrinking spread and margin, widening competition among liquidity-pools (decentralization)... and all the other "good" stuff (to users) is primarily in the spot market, not much in the FX options market. The Reasons beneath are intriguing and offers a glimpse of the true drivers in FX markets.

Spot and Options are kind of 2 extremes in terms of commoditization.....

FX Futures (mostly on CME) is fully standardized and "bulldozed" as equities markets were bulldozed decades earlier. But I was told forward market is still bigger and more popular. Why?

Buy-side probably prefer standardized instruments -- cheaper, transparent, fierce sell-side competition ... but
Sell-side probably prefers the good old OTC contracts.

Dealers like things murky, and worry about too much transparency. The more murky, the more they can charge big spreads for the "service" they provide. A major reason for the shrinking margin in equity dealing desks over the past decades was the regulatory change to drive trading on to exchanges.

FX options are largely unaffected. Dealers don't want to publish their quotes. Instead they respond to RFQ, according to a friend. (In theory, there might exist some *private* market maintained by a single market-maker, but I don't know any.)

Fwd is similar. However, I was told the standard spot trade has a T+2 settlement and works like a short-term forward contract. Also, spot traders do a lot of rolling, so fwd trades and rates are ubiquitous.

Bank sends quotes (perhaps RFQ replies) to ECNs and also privately to individual clients. Known as "Bank feeds". Notably, for a given currency pair at a given time, a bank sends slightly different spreads depending on audience -- tiered quote pricer. A sign of market fragmentation, IMHO. Note, bank feeds aren't always from commercial megabanks -- investment banks also produce bank feeds.

No comments:

Total Pageviews

my favorite topics (labels)

_fuxi (302) _misLabel (13) _orig? (3) _rm (2) _vague (2) clarified (58) cpp (39) cpp_const (22) cpp_real (76) cpp/java/c# (101) cppBig4 (54) cppSmartPtr (35) cppSTL (33) cppSTL_itr (27) cppSTL_real (26) cppTemplate (28) creditMkt (14) db (65) db_sybase (43) deepUnder (31) dotnet (20) ECN (27) econ/bank` (36) fin/sys_misc (43) finGreek (34) finReal (45) finRisk (30) finTechDesign (46) finTechMisc (32) finVol (66) FixedIncom (28) fMath (7) fMathOption (33) fMathStoch (67) forex (39) gr8IV_Q (46) GTD_skill (15) GUI_event (30) inMemDB (42) intuit_math (41) intuitFinance (57) javaMisc (68) javaServerSide (13) lambda/delegate (22) marketData (28) math (10) mathStat (55) memIssue (8) memMgmt (66) metaProgram` (6) OO_Design (84) original_content (749) polymorphic/vptr (40) productive (21) ptr/ref (48) py (28) reflect (8) script`/unix (82) socket/stream (39) subquery/join (30) subvert (13) swing/wpf (9) sysProgram` (16) thread (164) thread_CAS (15) thread_cpp (28) Thread* (22) timeSaver (80) transactional (23) tune (24) tuneDB (40) tuneLatency (30) z_ajax (9) z_algoDataStruct (41) z_arch (26) z_arch_job (27) z_automateTest (17) z_autoTrad` (19) z_bestPractice (39) z_bold (83) z_bondMath (35) z_book (18) z_boost (19) z_byRef^Val (32) z_c#GUI (43) z_c#misc (80) z_cast/convert (28) z_container (67) z_cStr/arr (39) z_Favorite* (8) z_FIX (15) z_forex (48) z_fwd_Deal (18) z_gz=job (33) z_gzBig20 (13) z_gzMgr (13) z_gzPain (20) z_gzThreat (19) z_hib (19) z_IDE (52) z_ikm (5) z_IR_misc (36) z_IRS (26) z_javaWeb (28) z_jdbc (10) z_jobFinTech (46) z_jobHunt (20) z_jobRealXp (10) z_jobStrength (15) z_jobUS^asia (27) z_letter (42) z_linq (10) z_memberHid` (11) z_MOM (54) z_nestedClass (5) z_oq (24) z_PCP (12) z_pearl (1) z_php (20) z_prodSupport (7) z_py (31) z_quant (14) z_regex (8) z_rv (38) z_skillist (48) z_slic`Problem (6) z_SOA (14) z_spring (25) z_src_code (8) z_swingMisc (50) z_swingTable (26) z_unpublish (2) z_VBA/Excel (8) z_windoz (17) z_wpfCommand (9)

About Me

New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin