State Street, with USD763 billion in assets under management, is readying a global foreign exchange options trading operation that will reportedly see the firm taking risk for the first time. State Street has hired Hank Lynch, a senior foreign exchange trader at FleetBoston Financial in Boston, as the point man for the operation. Lynch could not be reached. Calls to Mark Snyder, global head of foreign exchange and money markets, to whom Lynch will report, were referred to Carolyn Cichon, spokeswoman in Boston, who did not return calls.
State Street is attempting to compete in a mature market with razor thin-spreads and will need to build a huge portfolio of options to diversify the risk and create economies of scale if it is going to compete on price, according to traders. One trader at a competing firm noted that the success of the operation may rest on State Street's long-term commitment, with a start up operation likely not to see profits for as long as three years.
The bank is expected to make further hires for the new desk, possibly in London and Singapore, said an official familiar with the firm's ambitions. A headhunter said now is a good time to launch the operation as it can hire top quality staff that have been let go from first tier houses and would not normally consider moving to an unproven derivatives shop, such as State Street. "What's more, they are cheap," he added, referring to the availability of trading talent.
State Street already offers foreign exchange options to clients by executing back-to-back trades with market makers to hedge out the risk but is not believed to have a market making operation. Rival fx houses said State Street is rarely seen in the options market, but is an active player in fx spot. The firm is one of the largest custodians with USD6.2 trillion in assets under custody and as a result has huge captive client base including pension funds, corporations and non-profit organizations, which it can tap for the new business. One fx professional, however, speculated this is likely an initiative to raise its profile in fx options trading and capture more lucrative hedge fund clients.
Alison Gibbs, spokeswoman at Fleet in Boston, did not return calls.
