When it comes to FX spot and futures, there are plenty of choices for institutional traders to send their orders to. But when you if you are searching to buy an “off the run” FX option or forward with a non standard strike price or expiration, than things get a little complicated. Currently, ones options are limited to creating a trade idea and then calling around to different FX trading desks to request a quote. If a trader wants the best price, they would have to shop around for a better quote. Also, depending on how many banks a trader works with, they could be limited to very few trading desks offering them a price for their trade. Three year old SURFACExchange is out to change this business model.
SURFACExchange has created a trading venue called SURFACEwave, The platform caters to both on the run volatility surface trading and off the run custom requests. (Trading on the run volatility is similar to trading exchange contracts where there is readily available liquidity for predetermined contracts.) What has SURFACE has done is has innovatively combine the exchange model with the OTC market ability to trade bespoke contracts. Within the platform, participants enter their trade parameters and a “request for quote.” The trade is than broadcast to the entire network with liquidity providers quickly offering a price on the trade. Rather than needing to call around to different desks and explain the trade, it is all done electronically and quickly. On this, Evgeni Mitkov, CEO of SURFACExchange explained that his company is out to create the “EBS for the derivatives side of the FX Market, and allowing people to trade with each other.”
An Electronic Exchange
SURFACExchange acts as an electronic exchange matching buyers and sellers of FX derivative orders. As such, its business model perfectly addresses the requirements of the new regulatory frameworks in the US and EU. The trading venue had an EBOT status in the US three years ago, grandfathering it into the current Dodd-Frank regime. FX options will have to be traded on Swap Execution Facilities(SEFs) and centrally cleared. Once CFTC finalizes rules for SEFs, SURFACExchange will file for a SEF status, but will be allowed to continuously operate its platform while awaiting approval.
Citi FX Prime Brokerage is the central counterparty on SURFACExchange . Before becoming a SURFACExchange user, participants need to create a credit relationship with Citi directly, or work with a bank that has credit lines with Citi. After receiving authorization to trade on the platform, traders become equal participants regardless of their size or trading style.
SURFACExchange also provides its participants full market depth, full transparency of RFQs and trades done on the platform, historical market data including volatility, deposit rates, forward rates, and spot rate prices. Along with this, users have access to the company’s derivatives pricing software.
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When asked about the product’s main advantage over the market structure of 40 years, Evgeni Mitkov answered that the “sweet spot of the exchange is allowing people to trade with each other, anonymously.” Rather than liquidity being offered by only a small number of large institutional FX desks, hedge funds and second tier banks are able to participate in filling quote requests. Mitkov explained that “allowing other non banks to market make is a first in the FX derivatives market. The result is that, users of SURFACExchange will have access to increased liquidity and better pricing. Anonymity opens the possibilities for entirely new trading strategies to be deployed and reduce slippage.
Currently, the trading venue has 43 institutional clients, and Zero Delta Straddles are the most popular product traded on the venue. Minimum trade is $100 000, and the typical trade ranges from $5 to $50 million. On this note, Evgeni Mitkov added that “with the electronification of trading you always stumble across the reduction of trade sizes, and we are starting to see that on our platform as well. People are willing to chop up their trades into pieces since it is anonymous.”
Evgeni Mitkov believes the trading platform has reached “critical mass” in regards to number of clients. During the current slow summer months, the venue has also seen a steady stream of trades taking place. The autumn months will be interesting to watch as the critical mass of clients start engaging the platform more often.
In the autumn, SURFACExchange will be expanding its strategy coverage and emerging market currency pairs.