FOCUS : APIs: helping to integrate an Options platform within the FX
Michel EveraertCIO e-commerce at GFI Group, explains how APIs free banks to
concentrate on providing a tailored service to their clients.
Michel Everaert explains how APIs free banks to concentrate on
providing a tailored service to their clients.
The late 90s saw many banks launch online FX trading systems
enabling their clients, internal branches and subsidiaries to log
on and trade spot and forward. Users simply selected currency pair
and size and, with a single click, executed their trade. Adding
margin, checking credit lines and other elements were performed
automatically in the background.
This new e-commerce DIY approach suited many buy-side users, while
at the bank sales peoples workload reduced, providing the
opportunity for them to focus on more value-added activities. As
these systems became widespread, efficiency increased and costs
In FX, online trading seemed to have stopped at spot and forward.
Even now, few banks offer online trading of the directly related FX
options market. It seemed a natural next step but many banks were
slow to move forward. The reduced e-commerce spending following the
dot-com bust definitely played a part, but many banks simply balked
at tackling the added complexity involved in trading options
online. Also, since options were less liquid and more tailored, it
was felt many end-users would not be comfortable trading them
online. There was therefore less incentive to automate since the
efficiencies made in spot were unlikely to materialise in options.
Options for efficiency
But that was then. Almost a decade on, fuelled by increased
marketing of vanilla and, more importantly, exotic options,
liquidity has grown significantly. The latest Bank for
International Settlements survey, in 2004, found that global daily
turnover in interest rate and foreign exchange related derivative
products - including outright forwards and foreign exchange swaps -
increased by 74% between 2001 and 2004 (51% at constant exchange
rates), to $2.4 trillion.
With this increased liquidity of vanilla and simple exotics, end
users familiarity with options has increased. This has made them
more comfortable with the concept of trading options online. Also,
the scale of operations at large sell-side banks to serve this
growing customer base has made the business case to trade options
online significantly more compelling. A few major banks saw this
and were first movers in offering online trading of FX options and
have been very successful at it. This competitive pressure and
client demand mean that other banks are now looking to offer online
trading. How to do this quickly and cost effectively though?
Spot and forward trading platforms require integration with systems
covering market data, client reference data, limits and
authorisation information, risk management/position-keeping and the
back office. But such integration is relatively straightforward
compared to what is required for options. Option trading requires
mathematical models, interpolation routines and more complex market
data such as volatility surfaces, preferably all generated and kept
up to date in real-time. This complexity coupled with the nuances
related to each of the many possible strategies that can be traded,
quickly reveal that the systems developed to handle spot and
forward trading are rarely suitable. Separate, dedicated systems
supporting option trading are required.
There is more. As clients do not want two separate systems from the
same bank to trade the spot/forward and option markets, the new
options technology has to be linked to and be integrated with
existing e-commerce infrastructure. This is to ensure that items
such as login, workflow, branding, etc. are presented in a uniform,
consistent manner to the end users.
As easy as API
Including options in an e-commerce platform confronts banks with
the familiar build or buy decision. With many banks deciding that
building complex IT systems is not - nor should be - one of their
core competencies, they are increasingly looking to system vendors
who can partner with them in delivering trading platforms to their
Another advantage of the API approach is
that it gives banks assurance regarding retaining their own
Key to success in implementing the highly integrated solutions
described above, has been Application Programming Interfaces
(APIs). APIs allow banks to take vendors software and build links
to their own systems, tightly binding the new and existing
technologies together and delivering the uniform client trading
experience. APIs enable IT departments to deliver integrated
solutions rapidly and effectively.
Another advantage of the API approach is that it gives banks
assurance regarding retaining their own intellectual property. Much
of how banks add value is bound up in the models and methodologies
they use to calculate option prices. Using APIs to link their own
models and methodologies to vendors trading systems means that
there is no danger of them being exposed externally since a banks
own development staff can perform the integration.
Alternatively, using APIs makes it easier to augment an internal
development capability by retaining the services of a vendors
professional services teams who can write interfaces to the banks
systems. Whichever route is chosen, APIs are a quick and efficient
way to reduce the pain for banks in creating an integrated spot,
forward and options trading platform for foreign exchange.
Freed to add value
By using APIs to integrate trading vanilla options with spot and
forward FX trading, banks can free their staff to spend time
developing relationships with clients and developing products
structured to their needs and thereby add value.
These structured products are the new exotics and will not be
automatically screen traded any time soon. Banks that use vendors
that supply APIs with their trading platforms will find that their
staff spend less time on technology and more time on meeting
clients ever more complex needs.
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