Volbroker (ICAP and Tradition) to publish FX volatility Index

FX traders are known to follow the USD Index as a crucial insight into the state of the Greenback against a basket of major currencies. This is tied in with the VIX Volatility Index to get a gauge on trader sentiment. Traders can now benefit from a new Fx volatility Index quoted by Volbroker.

Volbroker, the FX options Trading Platform operated by two interdealer brokers and a consortium of banks, will today begin publishing market rates on the volatility levels of seven key currency pairs, paving the way for a currency volatility index, or fear index, for the first time.

The platform will allow daily fixing rates to be market-based and not compiled by banks. The move to quoted rates – based on traded volumes in the FX options market reflecting demand from major dealers – marks a step-change in the currency markets.

The fixing price will be based on trades executed on Tradition-Icap’s Volbroker FX options platform, with the rates published daily at 4pm London time on Reuters and Bloomberg. The rate of volatility between the euro and the dollar will be the first fix quoted.

Terry Benson, global head of business development for Tradition-Icap, told Financial News: “By creating an independent, reliable reference point that the market can rely on, products such as volatility indexes and cash settled forward volatility agreements can be created and expanded.”

At present, there is no standardised rate to reflect the market price for the volatility of a currency pair, which is needed to price an options contract. At present, traders looking to capture the level of expected forward movement of a currency pair must trade bespoke and rely on bank-quoted rates.

Its calculation marks a similar move to market-based reference rates in the interbank-lending market, where rates based on collateral traded in secured lending markets have begun to supersede bank-quoted rates such as Libor, which have been open to allegations of price manipulation in past years.

The Volbroker-quoted rate would be difficult for banks to manipulate by quoting variable prices in attempt to “game the system”, analysts say – as the daily fix will be priced according to volume-weighted averages.

Since the NFA leverage restrictions FX brokers have been reviewing products like FX options to fill the gap. Alpari teamed up with FX Bridge to offer traders access to currency options.