The transparency provided by algos remains a matter of debate, in Schümperli’s view, but he does recognise the reasons behind the growth in FX algo use. One of them being that most banks risk appetite to carry large FX positions is diminishing and hence customers need to find alternative channels to unwind their large positions.
“FX algos are suitable for buy-side customers who want to hide, mostly larger amounts, in the market by using an appropriate strategy from their preferred bank. The software then anonymously executes the order over a predefined time horizon. Avoiding market impact in order to achieve a better execution rate, i.e. saving cost, is clearly the goal,” he said.
A matter of currency
Two of the most pressing execution concerns for buy-side tend to be market impact and cost. Clients that Schümperli has spoken with are split on the benefit of FX algos, however.
“The feedback I got was mixed, some like them, and others don’t,” he said. “One probably has to consider the currency you want to trade, is it a liquid currency or is it an illiquid currency? If it’s a liquid currency, I am sure it can work really well, if the currency is not liquid then there are probably better ways than using an algo.”
QCAM also provides TCA services in cooperation with third-party providers for clients and prospects who would like to find out about cost saving possibilities within their current FX execution setup.
“People have become more alerted to hidden costs,” he said. For a spot rate, verification is simple, you can look it up in your Bloomberg or Reuters Eikon terminal to get a good indication, however these quotations are informative and not tradeable rates, he says. When it comes to FX options or swaps, it gets a bit more complex. “If you are not a professional market user with in-depth know-how, you may not at first recognize that maybe your FX provider has taken some additional spread,”, he said, adding that factors such as credit cost need to be considered as well.
And TCA with algos is trickier yet, since the order is going to one provider and the problem of not having a consolidated view to benchmark rates remains an issue in the market. However, there are now providers out there which offer post-trade analysis of FX algo-execution, which should allow customers to measure performance of algos across providers, net of fees. “For that reason, I think the TCA is extremely important and that’s why these (independent TCA providers) companies are growing at a very strong rate,” he added.
