Commerzbank FX algos provide adaptability in volatile markets

May 2020 in Top Stories

With regards to volatility, FX has had a relatively quiet period since 2016. As market volatility increased in February (EURUSD moved 776bps (859pips) from a high of 1.1495 on 9th March to a low of 1.0636 on 23rd March) my initial thought was clients would prefer immediate execution certainty provided on a risk transfer basis.

The chart below shows the primary market spread for EURUSD and GBPUSD versus the realised volatility for the first four months of 2020. Interestingly, throughout the peak volatility far outpaced the increase in spread for EURUSD and we are still seeing spreads some 40-50% wider than pre-pandemic.

As this divergence occurred our dynamic passive pegged based strategy, Tracer, performed notably well in this environment. Both our in-house technology and our suite of FX algos have outperformed in light of the increased data consumption, distribution and trade flow, with average daily spot volume more than tripling in March.

In addition, recent market developments have highlighted the challenges of a strategy that runs off static parameters. Our Twap Advanced strategy already has an IntelliVOL parameter option that allows users to dynamically adjust execution time based on external market conditions. Tracer has also allowed clients to capture spread while simultaneously reducing market impact.

The rise in volumes meant the rate at which Tracer was filled increased and so we saw no additional market impact. The two passive strategies, Tracer and Twap Advanced, accounted for over 81% of algo volume for us in Q1 2020.

For our regional FI clients, they particularly appreciate the anonymity and DMA type execution our Hunter algorithm provides them. Hunter creates the opportunity for potential price improvement while negating information leakage working in Stealth mode, a new parameter we released in Q1 2020.


Furthermore, we are continuing to extend our FX order distribution to new venues and have recently integrated our FX order suite on two new venues: FXAll and BidFX. We have also updated our algorithmic strategies across existing platforms and our single-dealer platform, Commander FX Live Trader.

We have created a new Auto Stop Loss strategy that is a combination of a traditional Stop Loss and Stop Limit for clients providing them with increased transparency and automated fills.

Our limit order execution and risk management has already been fully automated for several years, but with the introduction of the Auto Stop Loss we have completely eliminated any potential conflicts of interest across all FX orders.

In Q1 we added two leading new firm (non-last look) exchanges to our liquidity pool, LMAX and CME, and have removed providers that were underperforming. We are optimistic both venues will provide deep liquidity given their unique client segments.

In the second half of the year, we will be taking parts of our Hubble platform and making it available to clients in real-time as a component of our TCA. This includes our proprietary market volatility indicator, IntelliVOL, which will allow our clients to be better informed of increased activity throughout their order execution.