Written by Chris Jackson, CEO and Co-Founder of OptAxe. First published in Tabb Forum on 25th Oct. 2024.

Having worked within FX options businesses for many years I have directly experienced the manual liquidity discovery process which impacts the achievement of successful trading outcomes.
The challenges traders face when tasked with delivering slick execution and performance returns in a non-automated market are - to a large part - a matter of process inefficiency and frustration. However, when you overlay this with globally rising capital costs, market participants urgently need to access, recycle and clear more FX option risk, whilst still facing unreliable and expensive distribution methods.
Whether an organisation holds or wants to acquire a large position i.e. when they have an axe, it faces outdated, manual channel choices for sourcing, and executing with, an opposing interest. In fact, across the industry, our analysis estimates that only 30% of FX options business is electronically traded (by number of tickets) and the notional is actually much lower than this, closer to 10%.
So what are the challenges and critically, what is the innovation that can be applied to significantly raise the bar for liquidity discovery that can effectively unlock trading opportunities?
It's not easy to automate FX Options
Inherently, it's not easy to electronify options as there are so many moving parts and without the technology that has enabled foundational change in the other areas of FX trading (80% of spot and forward trading now flows electronically) voice-driven trading and manual processes have continued to prevail.
Manual actions clearly lack transparency, introduce inefficiencies, add risk, and crucially draw time that markets do not wait for. Moreover, the present model offers limited ability to ‘control’ outcomes as it is extremely hard to monitor or update the information that is being communicated across multiple chats, phone calls and platforms.
Fewer salespeople, less equipped Over recent years the number of salespeople in market-making institutions has declined substantially as banks have cut headcount to cut costs. However, over the same period, there has been a significant shift in the organisational structure of active hedge funds who form a large part of the FX options trading community.
The trend for multi-pod portfolio management teams, operating independent risk books within the hedge funds has grown exponentially. Some hedge funds can now have over 100 individual risk takers vs the average hedge fund sales desk made up of approximately 6 individuals in each region. Already lean, the eroded number of salespeople are just not able to cover and support these rising numbers adequately,let alone the growing sophistication of other buy-side FX options end-users.
Shrinking Interbank Counterparty Lists
In the FX options interbank market, the amount of direct dealing between banks has also significantly reduced as multiple international crises and sanctions have curtailed trading with banks in certain jurisdictions. Authorised dealing lists are getting smaller and hence the pool of available liquidity with which to enter or exit positions is diminished. Information leakage is also harder to control around sensitive options exposures.
Regulatory and Economic pressures
Ongoing global economic conditions continue to drive the need for cost savings as trading businesses strive to maintain market share and make performance gains. In terms of basic business, costs are being scrutinised for savings. Over the last few years, the cost of running a market-making business has risen significantly as organisations are required to meet increasing regulatory demands.
What’s more, fulfilling the obligations of the Uncleared Margin Rules [UMR], and posting Initial Margin on all trades, has particularly impacted the cost of carrying out FX option business. Institutions are now increasingly having to justify, and make provision for, bilateral trading that has a high impact on balance sheets.
It’s time for a major reassessment
The traditional request-driven hunt for shrinking liquidity and the comparison of multi-dealer quotes from multiple channels is no longer serving the market. The need for a fit-for-purpose, technology-delivered solution has never been higher.
It's time to apply innovation that fully flips this approach- it's time for a major reassessment as to how fx option liquidity is sourced and executed upon. It's time for a centralised facility that fully automates manual, bilateral processes and consolidates available axe inventory into a single platform. A multi-issuer, not a multi-dealer platform, RFQ based, realises this goal.
But applying innovation is not just about improving efficiency to resolve exasperation. Technology can now properly evolve the FX options trading model. With fully available automation and liquidity consolidation, comes transparency and the confidence to make more intelligent decisions on data presented. With intelligence, comes the potential for market growth.
The capability to view pooled pricing variables and risk interest will further enable smarter and swifter trading decisions for all. A centralised facility that gives users the ability to show the risk they want to share can open the way for blurring the traditional lines/descriptors of market makers and market takers. Liquidity then just becomes that much richer.
Now is definitely the time to raise the bar for FX options liquidity discovery.