ParFX Plans Push into Derivatives

ParFX is exploring an expansion into currency derivatives, eyeing the opportunity to bring the principles behind its wholesale electronic spot foreign exchange platform to a growing segment of the market.

It has already applied for a market identifier code, or MIC, for a venue that will trade non-deliverable forwards (NDFs) and other derivatives products, according to information gleaned from the International Organization for Standardization (ISO).

The ISO issues MICs to identify exchanges and trading platforms to allow the automated processing of trades. WatersTechnology understands that this exploration is still in the initial stages. The full scope of the NDF platform is not set, and internal discussions have not begun. Still, ParFX has already snapped up domain names, and secured the market intelligence and analysis needed to build a business case for the product expansion.

“This is not a done deal, but we are currently in the early stages of engagement with a range of stakeholders, including our customers and prospects,” says Roger Rutherford, chief operating officer at ParFX. “Any launch will be subject to necessary regulatory approvals, as well as an extensive testing period.”

From a commercial aspect, it makes sense. Rutherford says trading activity shows the NDF market is one of the fastest-growing segments in FX. In the UK alone, average daily volume rose from $90 billion to $139 billion in 12 months, according to the Bank of England Joint Standing Committee reports for October 2017 and 2018.

“However, counterparties continue to suffer from inefficiencies related to liquidity, high trading and brokerage fees, and rising market data costs,” he notes, talking about the potential in the NDF segment. “It cannot be ignored, and it is incumbent on us to analyze the potential.”

Other companies are also recognizing the pickup in market interest. In February, Goldman Sachs introduced what it believes is the first “smart” algo for trading NDFs, saying it had seen a “real sea change” in the number of NDFs that trade electronically.

As the NDF market evolves, there is an opportunity for ParFX to help it develop, the company believes. This could be done sustainably and still make sure the market remains suitable for exchanging FX risk.

If ParFX decides to move forward, it is likely it would use randomization – a series of pauses to the elements of an order – and post-trade transparency in its NDF platform. This could help stave off any bad trading behavior that might emerge.

On principle, the trading platform charges everyone the same brokerage fees and delivers market data to all participants at the same time. That is designed to prevent those with deeper pockets from buying themselves an advantage.

“Since inception, ParFX’s strategy has been driven and determined by a market need and underpinned by an innovative product development and growth programme,” Rutherford says. “This ensures we cater to the requirements of our customers and the wider FX market, and operate according to a set of principles and ethos that create an equal, transparent and fair FX trading environment.”

This article was initially published in WatersTechnology’s sister title, FX Week.