FFAJ Binary Options Trading Report to Jun 2015
The Financial Futures Association of Japan publishes a report on Japanese binary options trading each month. This article looks back at the last eighteen months and looks for clues as to the future development of this high profile market.
Binary Options Premium Traded by FX Pair
What is quite apparent from Fig.1 is that the volume of binary options traded, as measured by the US dollar equivalent of premium changing hands, has not shown any material growth over the last twelve months. Just four pairs, i.e. USD/JPY, EUR/JPY, GBP/JPY and EUR/USD would appear to attract any interest at all.
The below table shows the decline in volumes over the three six-monthly periods. The first column shows the average monthly volume over the last eighteen months, with the second and third columns showing the average monthly volumes over the last year and six months respectively. The last six months shows a small decline across each of the FX pairs but that decline is minimal suggesting that it may have bottomed out.
|Table 1: Average Premium Traded by FX Pair per Month in USD(m)|
|Over Last||18 Months||12 Months||6 Months|
The USD/JPY volumes in March and April 2014 are now obviously exceptional trading periods quite probably down to trading exuberance due to a new game in town, possibly this new game got a boost from boosted launch advertising campaigns by the brokers. Whatever the reason those volumes are now in the distant past but are there any reasons to believe they may be resurrected? Well, not in the near future and this is why.
Last night, 25th August 2015, the CME USD/YEN at-the-money September call option settled at 0.77 having traded 422 contracts, the put settled at 0.73 having traded 172 contracts. Each 0.01 of premium is worth $12.5 so the premium that changed hands was 77 x 422 x $12.5 = $406,175 while the equivalent put premium traded was 73 x 172 x $12.5 = $156,950; total ‘front month’ at-the-money premium equated to $563,125. The total premium that changed hands yesterday on the CME for all strikes and expiries was $16,285,312. Multiply this by 20 (trading days in the month) and $325.7m pops out.
So based on yesterday’s premium volumes on the CME a monthly total of $325.7m is significantly lower than the $487.8m traded in Japan. On reflection those Japanese numbers are quite extraordinary with presumably every FX-trading housewife getting stuck in. Unfortunately the sudden fall off in volume most likely reflected the quick recognition that money isn’t being grown on trees, that getting the market right more often than not is required in order to avoid chasing good money after bad.
Active Accounts & Volumes per Active Account
Active Accounts peaked at 16,315 during September 2014 having risen from 12,062 which was the number of active accounts during the highest volume month of April 2014. During those heady days of April ’14 the average client was trading 0ver $66,000 of premium per month.
Over the last twelve months and 6 months the average premium traded per month per active account fell slightly from $12,102 to $11,873, an insignificant drop which yet again, perhaps, provides a basis from which one might positively extrapolate a rise in volumes.
This section looks at the percentage of winning traders over the last eighteen months in the three categories provided by the FFAJ, binary options (which has been interpreted as what is sometimes referred to in Europe as ‘Ladder Options’), Touch Options and Range Options (aka Tunnels or Corridors).
The definition of ‘Winning Customer’ is:
the number of customers who’s trading generated a profit over the month/total numbers of customers who traded
Binary Options (Ladder Options)
Fig.3 shows the percentage of winners under the category ‘Binary Options’ which might alternatively be called ‘outrights’ on a mainstream futures exchange, or ‘Ladders’ for the European retail market.
Table 2 provides more exact average data of the percentage of winners with the blue column being the mean of the whole eighteen months. Apart from JFX who are giving their customers a run for their money, the percentage of winners is too low, quite unnecessarily too low.
|Table 2: Average Winning Ladder Traders|
|Period||Jan 14 - Jun 15||Jan 14 - Jun 14||Jul 14 - Dec 14||Jan 15 - Jun 15|
|FX Prime by GMO||33.1%||33.1%|
|FX Trade Financial||21.9%||21.3||17.9%||26.3%|
The average number of winning clients during each six month period is in the 27% bracket. What it does not do is provide information as to how much the clients are losing on average each month. On the basis that most client’s winning and losing in terms of calling the market correctly will be around 50% would mean that the bid/ask spread offered by the binary options provider will determine the percentage of winners. The tighter the bid/ask spread the greater percentage of winners. For a given amount of premium traded, e.g. Fig.2 suggests $10,000 per month, the smaller the client’s individual trade the greater the probability of the client losing since the compounding effect of trading against the house will increasingly offset the probability of the winning trades.
These are positions the trader takes whereby a price level is chosen to be hit or not to be hit.
Unfortunately only IG Securities and FX Trade Financial are up to being able to figure out the fair values of these strategies and subsequently the only brokers to offer these strategies. Over the eighteen months IG Securities has clients with a 31.5% win rate on average, while FX Trade Financials, over the twelve months they have been involved offering Touch Options average out at winning clients of 30.5%.
These are the binary options version of a conventional options ‘Strangle’ and after GMO Click ducked out of the market FX Trade Financial have ruled this particular roost. But even then they have lost out to customers on three months.
Nevertheless, good for FX Trade Financial for giving it a go. Seriously, how difficult is it to add the bid of an out-of-the-money put to the bid of an out-of-the-money call? Do it and you have a bid price for the Range Options. Repeat the same exercise for the put and call’s asking price and, hey presto, you have two-sided price for the Range Option. And you brokers who are not offering these fundamental strategies should hang your head’s in shame (and then email me, I won’t be cheap!).
The Japanese binary options market has immense potential although over the last year the premium traded has stagnated.
The level of expertise in binary options risk management is clearly not at the level needed to competently make two-sided markets in these instruments and this shortfall needs to be urgently.
The brokers should be offering as many different instruments as possible since this enables the broker to more effectively risk manage their position.
Finally this market needs to be more competitive price-wise but this can only be achieved by better risk management. Risk management, as ever, becomes the keystone to a successful market-making operation, leading to a more competitive price offering, in turn leading to more clients, which in itself is the most efficient form of risk management. A virtuous circle indeed!