BNP Paribas has developed a new client offering which bridges the gap between FX algo execution in both the OTC and FX futures markets for the first time. The new hybrid execution functionality was created as a solution for clients who are only able to trade FX as regulated futures instead of being able to access the often more liquid OTC market. Asif Razaq, Global Head of FX Algo Execution at BNP Paribas, says: “Some clients are finding it challenging trading FX in futures notional compared to OTC, as they are struggling to find competitive pricing and liquidity on the futures exchange itself in certain currencies. In response, we developed a unique solution that allows clients to submit their order in futures notional but to choose a new parameter which allows the selected algo, such as Chameleon, to source the liquidity from the OTC market. Yet even if the algo sources liquidity via the OTC market, the client only ever settle against a futures transaction. This offering delivers the best of both worlds for the client, the liquidity of OTC and reduced market impact, but with the audit trail and accountability of an FX future.”
Our client demographic is changing, with an increasing number now operating multi-asset execution desks. These clients require a solution they are familiar with from our FX offering, but are now able to apply it to executing FX futures as well. BNP Paribas recently launched our new algo platform for futures, using the same algo suite and related toolsets which we developed for FX, which includes the various strategies such as Chameleon, Viper, Iguana etc. This enables our clients to have the same user experience when trading listed derivatives as they can have for trading FX, including our full suite of cutting edge tools, from real-time analytics to our digital trading assistant ALiX, which provides clients with commentary on the algo during execution. We believe that we are the first bank in the industry to introduce the concept of fourth generation, interactive execution, to the listed algo space.
Further to that development, we have now combined our offerings for FX algos and listed algos to create a new form of hybrid execution. Many of our clients only have FX exposure in the form of FX futures and are restricted to only trading against on screen liquidity in FX futures markets, such as CME. This creates an issue for these clients, as liquidity in futures for certain currency pairs may not be as rich as in the OTC market. This is particularly challenging when trading large size orders through futures markets on a single venue execution with liquidity constraints, often resulting in increased market impact.
The new algo platform for futures uses the same algo suite and related toolsets which BNP Paribas developed for FX, which includes the strategies such as Chameleon, Viper, Iguana
As a result, we realised that some clients were struggling to find competitive pricing and liquidity on the futures exchange itself. In response, we developed a unique solution for such clients which allows them to submit their order in futures notional using their existing OME/EMS platform, but now with an option on the ticket to allow the algo to execute the order in the OTC market. When they select this parameter on the algo ticket, the algo can redirect to source the liquidity from the OTC market, thus providing them with a far better execution in many cases.
In parallel, our algo strategy – such as Chameleon – is also trading the basis risk to go from spot to the CME contract date of the future, building an all-in price for when the execution is complete. The algo is then able to package the order up as an all-in future, reports it to the CME as an Exchange For Related Position (EFRP) and the client receives a trade confirmation in their system as a futures transaction. Even though the algo has sourced the liquidity via the OTC market, the client only ever sees a futures transaction and does not need to take any settlement on the OTC executed trades.
We were able to bring this to the market because we have a strong product offering in algos for both OTC FX and futures markets. This has allowed us to bridge the gap between these markets and bring the best of both to our clients – improved liquidity with reduced market impact, coupled with the benefits of futures, including clearing, increased transparency and fully auditable. We anticipate this form of hybrid execution to gain popularity with hedge funds and also increasingly with the with the real money community, due to the impact of new regulations such as Uncleared Margin Rules (UMR) and SA-CCR. These client segments will increasingly be looking for solutions such as hybrid execution to help manage their credit exposure by turning to listed execution, while still benefiting from access to the more liquid OTC market.
