New Ways to Trade: Hybrid Financial Products
- Forex Magnates' Quarterly Industry Report takes a look into hybrid products: We examine mutated hybridised end-products, that often combine existing elements of trading platforms with components of other offerings.
Creativity and innovation go hand in hand, and what is known as ‘hybrid products', which could be a platform, a contract, or an instrument, requires the two. In Forex Magnates' new Quarterly Industry Report for Q4 2013, we assess different aspects relating to hybrid products, such as their origins, the benefits and possible pitfalls they pose to investors and brokers, and the different types of these products now being offered.
Among those products are Cross Currency Pairs, derived from two major constituents; Investable Indexes from basket of underlying assets; new products with features of one or more existing products (Hybrid Mutations); and completely new instruments.
Different Types of Hybrid Products
Completely new instruments are the hardest to create due to the tremendous creativity, time, resources and technical prowess they require. We will look into new and innovative ways of trading existing underlying instruments, while products that are often positioned as new instruments, or even asset classes, may merely represent an underlying asset and therefore be a synthesized derivative of that underlying product.
Rather than creating a completely new instrument, a somewhat easier approach can be to synthesize a new instrument from a set of underlying instruments, assets classes or securities. Such an approach has been used to construct indexes from things as simple as the US dollar Index, to far-fetched concepts like the number of billionaires in the world reflective in a tradable index that is representative of their cumulative wealth. A similar approach is also used in Mutual funds and Exchange Traded Funds (ETFs), and Contracts for Difference (CFD).
Is It Worthy?
In an interview with Forex Magnates, Didier Abbato, Vice President, Product Management at Saxo Bank said that for his firm, the offering of such products made little change. “Our FX offering is already pretty comprehensive so the addition of new crosses has a relatively marginal impact on our traded volumes. On the FX Options side, the new USD/ RUB and EUR/RUB crosses were well received. But what has been most beneficial was the extension of our streaming prices up to one year maturity earlier in the year."
"If we stay in the OTC world, the launch of big IPO-related names as CFDs, such as the recent launch of the CFD on Twitter, has a larger impact overall. Sometimes, it is also new trading functionalities that make a difference: For example the launch of Algorithmic Orders for CFDs has been a success, especially towards the larger trading clients,” Abbato told Forex Magnates.
Pricing Complexities
With regards to deriving rates, Mr. Abbato said that, “Pricing is not difficult if you have access to liquid markets for price discovery and hedging. Saxo Bank does not tend to offer OTC products with low Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term. This is just not our business model. The real challenge lies in offering sophisticated features on a trading platform, such as the reporting and Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term tools that we make available to our clients. These are key differentiators that really set us apart from the direct competition, especially for the more advanced and demanding type of clients."
Certain firms use a set of formulas under the Black-Scholes model revised for FX, which helps price options accurately with regards to their underlying value or theoretical value, being reflective of current market conditions, expected sentiment, open interest and other criteria. Exchange-traded options will be priced somewhat similarly, and some providers such as CME even offer weekly FX Options, which in a sense is hybrid or unique. Featuring listings four weeks at a time, that expire on the last business day of each week with same strike price intervals and minimum tick sizes. Some firms like Saxo that also deal in OTC options, in addition to exchange-traded, may offer a wide range of expiries as well. Financial markets make it interesting to create "mutation" hybrid products, thanks to the use of math and related rules.
This structure pertains to how contracts function in time with regards to their pricing, and depends on both the kind of users trading and the regulation where the contracts are traded.
“The listed and OTC worlds are meant to converge ever more under the impulse of the various new regulations that will continue to affect our industry over the coming months and years. This will be a key driver behind the creation of new products of the more hybrid kind going forward,” Abbato told Forex Magnates.
During the last quarter, new platform GWAZY was launched to exhibit hybrid-like and new approaches to trading. Johny Abuaitah, CEO of Windsor Brokers Ltd, one of the first brokers to have launched it during its inaugural debut, told Forex Magnates of the drivers and hybrid-like functions behind GWAZY.
“We combined our solid experience in the market with their sophisticated technical background and shaped the GWAZY platform. We now act as their liquidity provider," Mr. Abuaitah said and added, “Unlike options trading, when it is the end of the trading session or when you wish to close a transaction, you still get a payout if you are in the market."
Johny Abuaitah, CEO of Windsor Brokers Ltd,
One of the biggest challenges in creating a hybrid platform, product or unique offering is pricing against the underlying instruments or indices. However, the challenge is not limited to pricing. Even with a new approach that may incorporate a hybridized solution from a wide variety of industries, technology is often the glue that helps bring together all components and functions of an offering.
The full article, with more about the different kinds of hybrids products, the unique challenges they pose and the stand of forex professionals, you can purchase the full Quarterly Industry Report for Q4 2013.
Related articles
Creativity and innovation go hand in hand, and what is known as ‘hybrid products', which could be a platform, a contract, or an instrument, requires the two. In Forex Magnates' new Quarterly Industry Report for Q4 2013, we assess different aspects relating to hybrid products, such as their origins, the benefits and possible pitfalls they pose to investors and brokers, and the different types of these products now being offered.
Among those products are Cross Currency Pairs, derived from two major constituents; Investable Indexes from basket of underlying assets; new products with features of one or more existing products (Hybrid Mutations); and completely new instruments.
Different Types of Hybrid Products
Completely new instruments are the hardest to create due to the tremendous creativity, time, resources and technical prowess they require. We will look into new and innovative ways of trading existing underlying instruments, while products that are often positioned as new instruments, or even asset classes, may merely represent an underlying asset and therefore be a synthesized derivative of that underlying product.
Rather than creating a completely new instrument, a somewhat easier approach can be to synthesize a new instrument from a set of underlying instruments, assets classes or securities. Such an approach has been used to construct indexes from things as simple as the US dollar Index, to far-fetched concepts like the number of billionaires in the world reflective in a tradable index that is representative of their cumulative wealth. A similar approach is also used in Mutual funds and Exchange Traded Funds (ETFs), and Contracts for Difference (CFD).
Is It Worthy?
In an interview with Forex Magnates, Didier Abbato, Vice President, Product Management at Saxo Bank said that for his firm, the offering of such products made little change. “Our FX offering is already pretty comprehensive so the addition of new crosses has a relatively marginal impact on our traded volumes. On the FX Options side, the new USD/ RUB and EUR/RUB crosses were well received. But what has been most beneficial was the extension of our streaming prices up to one year maturity earlier in the year."
"If we stay in the OTC world, the launch of big IPO-related names as CFDs, such as the recent launch of the CFD on Twitter, has a larger impact overall. Sometimes, it is also new trading functionalities that make a difference: For example the launch of Algorithmic Orders for CFDs has been a success, especially towards the larger trading clients,” Abbato told Forex Magnates.
Pricing Complexities
With regards to deriving rates, Mr. Abbato said that, “Pricing is not difficult if you have access to liquid markets for price discovery and hedging. Saxo Bank does not tend to offer OTC products with low Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term. This is just not our business model. The real challenge lies in offering sophisticated features on a trading platform, such as the reporting and Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term tools that we make available to our clients. These are key differentiators that really set us apart from the direct competition, especially for the more advanced and demanding type of clients."
Certain firms use a set of formulas under the Black-Scholes model revised for FX, which helps price options accurately with regards to their underlying value or theoretical value, being reflective of current market conditions, expected sentiment, open interest and other criteria. Exchange-traded options will be priced somewhat similarly, and some providers such as CME even offer weekly FX Options, which in a sense is hybrid or unique. Featuring listings four weeks at a time, that expire on the last business day of each week with same strike price intervals and minimum tick sizes. Some firms like Saxo that also deal in OTC options, in addition to exchange-traded, may offer a wide range of expiries as well. Financial markets make it interesting to create "mutation" hybrid products, thanks to the use of math and related rules.
This structure pertains to how contracts function in time with regards to their pricing, and depends on both the kind of users trading and the regulation where the contracts are traded.
“The listed and OTC worlds are meant to converge ever more under the impulse of the various new regulations that will continue to affect our industry over the coming months and years. This will be a key driver behind the creation of new products of the more hybrid kind going forward,” Abbato told Forex Magnates.
During the last quarter, new platform GWAZY was launched to exhibit hybrid-like and new approaches to trading. Johny Abuaitah, CEO of Windsor Brokers Ltd, one of the first brokers to have launched it during its inaugural debut, told Forex Magnates of the drivers and hybrid-like functions behind GWAZY.
“We combined our solid experience in the market with their sophisticated technical background and shaped the GWAZY platform. We now act as their liquidity provider," Mr. Abuaitah said and added, “Unlike options trading, when it is the end of the trading session or when you wish to close a transaction, you still get a payout if you are in the market."
Johny Abuaitah, CEO of Windsor Brokers Ltd,
One of the biggest challenges in creating a hybrid platform, product or unique offering is pricing against the underlying instruments or indices. However, the challenge is not limited to pricing. Even with a new approach that may incorporate a hybridized solution from a wide variety of industries, technology is often the glue that helps bring together all components and functions of an offering.
The full article, with more about the different kinds of hybrids products, the unique challenges they pose and the stand of forex professionals, you can purchase the full Quarterly Industry Report for Q4 2013.