OTC trading platform of the year: Fenics GO

Risk Awards 2021: hybrid protocol jumpstarts electronification of options block trading

Jean-Pierre Aubin, co-global head of brokerage

Some markets have resisted the pull of electronic venues for longer than others. The interdealer market for large-sized equity index options trades is one of those holdouts. But perhaps not for much longer – growing adoption of BGC’s Fenics GO platform suggests a shift in the way block liquidity is accessed for listed derivatives is imminent.

“For 23 years, the market remained the same and the way to trade did not change. No electronic initiatives worked before. Futures contracts or the outright calls or puts were electronic, but when it came to more complex option strategies – big size, complex structure – it stayed voice,” says Jean-Pierre Aubin, co-global head of brokerage at BGC Partners.

BGC set out to change this status quo with Fenics GO. Launched in 2019, the platform specialises in large trades, known as blocks, of listed options and futures products. A hybrid approach allows for multilateral request-for-quote style execution of various trading strategies. Aubin says the price users receive is better than the voice-equivalent around 70% of the time.

Initially, take-up was slow. Eurostoxx 50 options and futures launched on the platform in July 2019. Eight months later, its market share made up less than 1% for front-month and short-dated block-size trades. Then, traders started taking notice. By September, Fenics GO’s market share in front-month block size trades had grown to 6.3%, and 4.1% in all blocks with option expiries under three-months.

Nikkei 225 options, which were added to the platform in February, have seen faster growth. By September, the platform made up 13.6% of front-month and 10% of all short-dated options.

Aubin says the service may simply have been too disruptive for users at the start. This is now changing. “The brokers realised that the zero to six months business is no longer a voice product – it’s definitely an electronic product,” he adds.

Other factors may have delayed take-up. Just as Fenics GO was starting to gain traction, Covid-19 forced traders from their typical working environments to make-shift home offices. Integrating the platform into bank systems to ensure straight-through processing capabilities proved time consuming, especially during the pandemic, and meant that it took several months for usage to gain speed.

“It was a problem at the beginning because Covid delayed the onboarding process, but when onboarded, it is a system you can use from home easily,” says Aubin, noting that the platform’s best months have come as many countries experienced a resurgence in Covid-19 cases and economic restrictions.

Best execution is today the number one priority for our clients

Jean-Pierre Aubin, BGC Partners

Nearly 900,000 contracts traded on the platform in November, up almost 50% from October. Most of those contracts were on the pan-European equity index. “Had Covid happened a year later once banks were already on board, the platform would have accelerated even faster. What they’ve already achieved in such a short space of time is very impressive,” says a senior derivatives trader at a large dealer.

The platform’s appeal stems in part from its ability to translate the voice trading process onto electronic systems. This best-of-both-worlds approach blends familiarity with new perks such as audit trails and easy processing for execution and clearing.

“Best execution is today the number one priority for our clients,” says Aubin.

This can be difficult to prove in voice trading as it’s not clear whether the broker has gone to just one, or multiple counterparties.

With Fenics GO, trading occurs as a hybrid protocol of RFQ and a central limit order book. Market-makers stream tradeable prices for specific futures and options strategies and for specific sizes. Traders wishing to deal in a larger size than is presented on screen can request quotes in a private setting before the order appears on the lit book.

All trading occurs anonymously and multilaterally – a feature of the voice brokering process Aubin was keen to maintain. Traders can request both buy and sell prices to avoid revealing their full intention.

To incentivise trading and jumpstart the process, BGC enlisted the help of non-bank market-makers such as IMC, Lighthouse, Maven and Optiver early on. Depending on their traded volume, market-makers own a stake in the business and receive a rebate based on their flows.

There are added economic incentives for users – fees are 25% discounted from voice trades and can be as low as half their voice equivalents.

The big question is whether this electronic shift can be replicated for long-dated trades. For the moment, options with longer-dated expiries remain firmly in the high-touch domain of the voice broker, but Aubin says he’d like to see that change in 2021. Clients are also optimistic.

“It has the potential to become 50% of the market once it hits critical mass of short-dated trades. For long-dated trades, I wouldn’t be surprised if it’s 20–30% in its end state,” says the derivatives trader.

Also in the line-up for Fenics GO expansion are contracts on the German Dax index, French Cac 40, all MSCI equity indexes and at least one US product. Fenics GO also added the Eurostoxx banks index in August and the Hang Seng China Enterprises Index in December.