Implementation Shortfall algo from HSBC

The algorithmic FX execution landscape has seen some significant changes over the past few years; with clients showing an increased willingness to manage execution risk themselves in-house, and with their desire to see detailed Transaction Cost Analysis explaining their execution. HSBC has been adapting to clients’ demand and is exceptionally well-placed to meet it through our dedicated and segregated Alternative Execution Services team. Our Algos are simple to use, and dynamically route execution based on our cutting-edge quantitative research and analysis into various sources of liquidity and market microstructure.

Implementation Shortfall algo  from HSBC
With Allan Guild, Global head of FX and Commodities execution services at HSBC Global Banking and Markets.

Why are increasing numbers of HSBC’s clients considering algorithmic FX execution and what attributes does the bank have that put it in a good position to meet this demand?

The algorithmic FX execution landscape has seen some significant changes over the past few years; with clients showing an increased willingness to manage execution risk themselves in-house, and with their desire to see detailed Transaction Cost Analysis explaining their execution. HSBC has been adapting to clients’ demand and is exceptionally well-placed to meet it through our dedicated and segregated Alternative Execution Services team. Our Algos are simple to use, and dynamically route execution based on our cutting-edge quantitative research and analysis into various sources of liquidity and market microstructure.

What types of client are showing interest in your FX algos and what key benefits do they get from using them?

We are seeing an increased interest in our FX Algo offerings from all the client segments, with clients particularly attracted by the additional transparency offered by our innovative TCA. Clients who trade frequently, and have the necessary expertise to manage execution risk themselves, also see significant reductions in the cost of their FX transactions through the use of HSBC’s Algos.

What steps are you taking to enhance your FX algo suite and optimise the availability of the strategies you offer?

Our goal at HSBC, is to ensure that our Algos are easy to use and to understand. One way in which we do this, is by improving the accessibility of our Algos, both our own HSBC Evolve platform and the platforms operated by third-parties. We are constantly using the latest quantitative research and analysis to enhance our concise set of Algos; which in turn, help clients achieve better outcomes.

NAME OF THE STRATEGY: IMPLEMENTATION SHORTFALL

DESCRIPTION & CAPABILITIES
Implementation Shortfall is an opportunistic algorithm
It seeks to minimise the slippage against the arrival price (market price when the Algo starts)

EXECUTION OBJECTIVES
To achieve its objective, the Algorithm manages the trade-off between market volatility risk and market impact. It optimises the number of child orders to place across HSBC’s unique network of FX Liquidity Pools, their size and the time interval between them.

The Algorithm also balances the opportunity cost between placing passive orders or crossing the spread by using proprietary fill probability and market impact models. Time and size-dependent market impact is calibrated on the basis of historical market response to HSBC orders. Market volatility risk is assessed using HSBC’s proprietary real-time volatility model.

WHEN TO USE IT
When the client wants the transparency and cost benefits of using Algorithmic execution, whilst minimising the cost of execution measured against the market price at the start time of the order.

KEY PARAMETERS & FEATURES

  • The leniency parameter has three settings: Aggressive (prioritises clearing risk quickly to minimise the volatility risk), Passive (prioritises mimising the market impact of clearing risk), and Neutral which offers a balanced prioritisation between the two.
  • The client can also specify a limit price beyond which the Algo will stop executing.
  • Adapts to market conditions by using probabilistic models.
  • Has a modular structural design embedded within its decision-making process.
  • Has robust safety features to constrain its behaviour in abnormal market conditions.