Three New On-Line Option Pricing Services
For almost two decades, the Fenics foreign currency options pricing software package has been a standard feature of most bank trading rooms. Now, with the introduction of Fenics.com, Fenics' parent, Inventure Inc., is hoping to expand its market penetration—which some put at more than 90 percent of banks worldwide—without cannibalizing its pre-existing standalone software business.
It could be a tricky process. At the moment, Fenics.com lets users price standard over-the-counter currency options, risk-reversals, strangles, knockouts, double no-touches, one-touches and almost every other option combination available on the standalone software package, within the same familiar pages found in the old system—and all for free. Forward points and volatility levels are fed through to the pricing page from several large money-center banks that have agreed to partner with Inventure. Soon, users will also have the ability to input and run risk management reports on positions.
Access to the complete site will not be free for long, of course. A basic pricing calculator for vanilla options is likely to remain open to the public, but over time differentiated service levels and fees will be introduced. For example, the free version of the calculator may only have its spot, volatility and forward rates updated once a day, at the close of business, whereas the subscription service will always be in real-time.
But the fees will be remarkably low compared with traditional derivatives software systems, thanks to the wonders of Internet technology. Soup-to-nuts monthly subscription access to the site is expected to run only in the hundreds of dollars, not in the thousands.
Why so cheap? Inventure charges roughly $40,000 up front for the traditional Fenics system, plus another $40,000 for the analytics risk management module, plus monthly maintenance fees. At first glance, it looks like Inventure is shooting itself in the foot by drastically undercutting its own system.
Not quite. The company hopes Fenics.com will be able to penetrate the bank customer market directly or via current bank customers purchasing Fenics.com licenses on behalf of their clients. The goal: to attract business leading to full white-labeled service. The company announced in early May that it has already formed a strategic alliance with Bank of America, Credit Suisse First Boston, Societe Generale and UBS Warburg to provide price transparency to market participants via its web site. Presumably in return, Inventure is offering these financial institutions a certain number of site licenses to be given away in turn to bank customers. "Fenics is already the market standard for pricing,” says Inventure chief executive John Ashworth. "There is increased deregulation of world trade, and an appetite for cross-border holdings. Customers are more and more sophisticated, and a subscription license to Fenics.com should be a natural value-added service they can attain.”
"Customers,” he continues, "will be able to do revaluations of positions themselves using system parameters rather than having to pester a bank salesman for such information. They will also be able to run a variety of possible parameter permutations, and it will be easier to close out the details of any transaction.” According to Ashworth, all of this should change the average foreign exchange option salesperson into more of an adviser than a rote price processor.
Clearly, Inventure also hopes its current and future bank customers will not abandon standalone site licenses for the web-based-only service. Since maintaining positions or even pricing capability on an off-site Internet-based platform is still not an accepted practice within the industry, Fenics officials doubt that this will be a concern. "Fenics.com should be a complementary service rather than a directly competing one,” says Ashworth.
But where pricing starts, will transactional capabilities most likely follow? In a second-stage development, Ashworth believes, on-line currency options trading at Fenics.com is likely to evolve "as naturally as night follows day,” but this is not the site's immediate future. Ashworth clearly wants to make sure Fenics.com can coexist with Fenics before leaping into other more ambitious forays.
Of course, the great disintermediating force that is the Internet could change Inventure's plans in a hurry.
Fenics.com may have a two-decade pedigree in foreign currency options pricing, but the Internet has a way of throwing markets up for grabs.
Fenic's latest challenger is vbfi.com, which, on a trial basis, charges only 23 euros (about $20) a month for access to some of the most sophisticated option-pricing models around. And if you like what you see, you can get its full-blown portfolio of option calculators for approximately half the price of what a Fenics.com subscription will run.
Vbfi is an abbreviation of the firm's two trademarks, value-based financing and value-based investment. The firm, based in Paris, was founded by Thierry Philipponnat, a former equity derivatives specialist at O'Connor & Associates, Exane and UBS.
The site currently sports two distinct functionalities: a corporate finance-oriented section to help in the proper valuation of equities, and a separate over-the-counter option-pricing section. The option-pricing currently revolves solely around foreign exchange, but fixed-income and equity options pricing are coming soon. The company also plans to offer some portfolio risk management capabilities, although it has not definitively determined what features will be included.
There are, of course, other option calculators out there, GFINet.com being one established presence, but Philipponnat is convinced that his models are more cutting-edge.
"While GFInet.com may have a market feed and a user-friendly ‘real-world' feel to it, our exotic calculators are far superior to anything found on the web today,” he claims. "Competition is a fact of life, but as far as on-line exotic pricing is concerned, we are ahead of the crowd for the time being.”
Philipponnat's current list of exotic option models include single- and double-barrier options, digital options, compound options, chooser options, extendible and forward-start options, Asian options, performance options, lookback options, ladder options and cliquet options.
The site still has some rough edges. While the models may be extensive, and the underlying code cutting-edge, the labeling of vbfi's input parameters and output results available in May were a bit confusing. The company has made a few enhancements since, but it might still be possible for a neophyte corporate treasurer to confuse a dollar call with a yen call, for example. Philipponnat agrees that his company needs to work on these aspects to make the system more obvious and dummy-proof to use. Nonetheless, vbfi.com should hold some appeal for those on a tight budget looking for web-based pricing of complicated option products.
Knowing whether an equity option is theoretically cheap or rich relative to the historical behavior of its underlying stock would seem important information for any option investor. But while there has been no shortage of derivatives web sites popping up in the last few years, none has yet tackled the basic issue of implied volatility in a meaningful way.
Ravi Jain, a former over-the-counter currency options trader at Republic Bank of New York, is changing all that. His consulting company, eGAR Technology, has just launched IVolatility.com, a nifty web site that calculates historical and implied volatility figures and identifies volatility trends for every U.S. equity with listed options trading.
Using sophisticated data-mining and filtering techniques, the system converts all option prices for a given stock into three proprietary implied-volatility indices each day—one for out-of-the-money puts, one for out-of-the-money calls, and an average of both—all scientifically vega-weighted and put in terms of a 30-day benchmark. Users can compare these implied-volatility levels to historical volatility observed for each of these stocks, graph the historical relationship between the various data series, and even rank stocks in terms of the apparent cheapness or richness of their options.
It is a neat concept, and a vast improvement on services such as Bloomberg, where tracking implied vs. historical volatilities requires an overwhelming number of obscure keystrokes. iVolatility currently does not offer a real-time intraday feed of option prices from the trading floors, but plans to do so in the future. The system is currently available free of charge, although a nominal monthly charge will be levied by year-end.
So how can this newfangled service help you? In May, it told us that June Microsoft options were selling at only 40 percent implied volatility on average, while the 30-day observed volatility of the stock was well above 60 percent. If you wanted to hedge your Microsoft stock against further anti-trust case developments, buying options still appeared a relatively good bargain. Conversely, American Home Product options were trading at an average implied volatility index of 54 percent while observed volatility was only 38 percent. If you were not afraid of any sudden takeover play for American Home Products, maybe these options were priced too highly and were ripe for sale.
Are there other potential trading opportunities here? Sure, for users sophisticated enough to drill down deep. "We are ready to customize the system,” says Jain. "You can already set up individual portfolios of stocks to watch, and if an institutional user wants more strike-by-strike analysis, that will be easy for us to provide. The data is already there.”
eGar Technology also has other consulting projects in the hopper. It owns the development and marketing rights to the former FNX Intermark product FOCUS—a low-cost risk management system covering a variety of derivatives products. Jain also has a team of Moscow-based Russian programmers madly designing web sites for the capitalist world.
Does Jain miss trading currency options? "No way, it's too mature a market,” he says. Unlike, say, the Internet.
By Barclay T. Leib