BNP Paribas had already been making revolutionary changes to the FX algo market for some years, but realised there was a need for a further different flavour of algorithms following discussions with buyside clients about the broader, and often complex, workflows they were trying to solve for, says Razaq. As a result, the bank introduced the fifth Gen algo space, including Gamma, which automates the complex workflows and delta hedging involved when executing FX options trades, and Rex, which enables clients, particularly from the real money space, to automatically execute a large basket or portfolio of orders.
“The feedback we’ve had from clients about Rex has been amazing, but it also highlighted some of the legacy technology and integration issues which the group of clients can struggle with,” Razaq adds. “As a result, we made our BNP Cortex app available inside the Bloomberg App Store and ensured that Rex is available on any multi-dealer platform that the clients are actually using, such as FX Connect or FXAll. By investing in making these tools available on compatible technologies, it has significantly broadened the client base that we have access to.”
Systematic hedge funds
According to Razaq, one key group of new entrants which has started adopting BNP’s execution algos to a much greater extent than before are the systematic hedge funds. He explains that systematic hedge funds have typically not been interested in using bank based algorithms, preferring instead to build their own algo strategies instead. Yet as banks have become increasingly sophisticated in the FX algo space and the amount of analytics data they have access to has grown, systematic hedge funds have started conducting A/B testing to compare their in-house algo performance with that of a bank algo.
“More often than not, they found that we were actually outperforming their own internal strategy,” says Razaq. “This allowed them to look at the resources they were allocating to those algos and to start freeing up staff to work on other projects and begin using our algos to execute more of their orders instead.”
In addition, Razaq notes that the bank has recently been seeing a lot more trading activity from systematic hedge funds who are using the FX algos to execute more smaller ticket sizes consistently throughout the day.
“This has been a complete shift in the market,” he adds. “Algos were in the past typically only seen to be of value when used for mid to large size orders, but we are now seeing a new phenomenon taking place.
The systematic hedge funds are using the algo for small order sizes and yet they are still seeing value in terms of execution cost savings when compared to their internal strategies. As the new generation of FX algos and the techonology has evolved, this has brought a whole new flavour of client to our platform.”
Razaq believes that more of the benefits of using a bank algo are also being realised by this client base. He explains: “We have such diversification among the hubs and types of clients that use our algo product, which often means we can match different clients up against each other. They don’t have a mechanism in their own organisation which would allow them to trade in this way.
By using our algos, they can tap into our extensive franchise and access our diverse client base from our algo platform. This has shown the value of using our latest gen algos, such as Rex, which improve the quality, and reduce the cost, of execution for a much broader base of buyside clients than ever before.”