All the surveys indicate growing take-up of FX algos among corporates and the real-money community. But aren’t they the cautious ones? William Essex wonders how today’s regulatory environment could possibly be a good time to try a new approach to transacting.
Algorithms work well with regulation. They’re good at stealth, but they also deliver an unambiguous audit trail. “Algorithmic execution in FX is here to stay,” says Evangelos Maniatopoulos, global head of AES FX product and trading, Credit Suisse, understandably.
One sign of the times is that corporates are embracing FX algos for their cross-border business. Asif Razaq, global head of FX algo execution at BNP Paribas, says: “We’ve seen increasing demand in the corporate sector. Corporates are now beginning to see the true benefits of using execution algorithms.” Paul Downie, head of foreign exchange, Royal Dutch Shell, for example, has described algorithmic execution as the “lynchpin for continuous improvement” in his firm’s FX activity (citing transparency and flexibility as key drivers).
Not just corporates
Industry sources corroborate this, but it isn’t just corporates who are adopting FX algos. There is a lot of interest coming from the real-money buyside – hedge funds, pension funds, long-only investment firms – for whom the key attraction of FX algos is that they reduce the leakage of price-significant information that can occur during the execution of a large trade. Where corporates might be using FX algos to exit risk over the long term, the real-money buyside finds them an effective mechanism for immediate price improvement.
These are strategic and tactical differences; what’s significant is that both groups are using algos to achieve their aims. If the over-riding objective, in the current legislative climate, is to achieve multi-jurisdictional, robust compliance over time, algos are pretty much essential for transparency, TCA, oversight. FX algos might facilitate anonymity, not to mention HFT, but they’re also suited to a highly regulated environment.
Engaging with the execution process
This is at least partly because the buy-side has been engaging much more actively with the execution process. Corporates and the real-money community alike have been incentivised to engage by regulatory pressure and market instability. Gary Stone, chief strategy officer, Bloomberg Tradebook, says: “We’re seeing a lot of engagement from both sides, from liquidity providers and from hedge funds and the buy-side. In the past, hedge funds and the buy-side were takers; now we’re seeing them become makers. They’re playing both sides.”
Engagement is a two-way process, and while the buy-side has been getting to grips with algo execution, trading desks have been coming to meet them half-way by re-engaging with more traditional methodologies. Razaq says: “Some clients are calling the bank, just as they would for a voice trade, but instead are requesting, can you buy me €100m on Chameleon? The salesperson pulls up the algo order ticket, puts in the order on their behalf, and updates them as the order is executed.”
So the buy-side is moving towards algos, but (to the extent that it ever was) that choice is no longer an either/or. The industry is also moving towards a much richer “transaction experience” in general. Steve Aldridge, head of macro esales, EMEA, Credit Suisse, says: “Pre-trade, real time and post-trade; execution-advisory is something that clients increasingly ask for. It’s often the case that a client will come to us with a general question, to which we can provide specific solutions. For example, if I’m an execution trader, how do I demonstrate to my portfolio manager that I’m doing a good job?”
So clients are increasingly well informed about their need to be well informed, and – we’re back to this – algos generate information.
Similarly, Bloomberg Tradebook have now launched their Execution Consulting service, which is designed “to impact and add value to each phase of a well-crafted trade cycle”, as the website rather nicely puts it. Stone continues: “Clients are looking at how their orders interact with the market. Are they getting the results they are looking for? They’re asking: what can we do with different tactical algorithms to achieve the results they are looking for?”
It’s all about awareness. Razaq says: “We give clients full transparency on execution, with the Cortex iX post-trade report we break down every single transaction the algo has traded. Furthermore, to support TCA, as a bank we are making ourselves fully auditable to our clients. To satisfy the best-execution requirement, we also give the client a snapshot view of the market, including all prices and venues at the time the algo traded.”
FX-algo TCA is also changing client behaviour. Stone says: “We’re starting to see both the buy-side and the long-onlys work their order in the market, in an aggregator or manual-type fashion. The algos that people are using are reserve, I’ll iceberg the order, or I’ll peg the order, or I’ll do different things in that realm.”
All this, and best execution too.