As clients become increasingly sophisticated in their use of FX algos, including notably NDF algos, Goldman Sachs has focused on creating further efficiencies ‘under the hood’ of its algo offering. This has resulted in a recent change to the way the bank rolls algos, with a new focus on improving the forward points by “TWAP-ing” the points to ensure tighter spreads and better quality fills. The new methodology involves rolling the child orders during the execution of the algo, so each time a fill comes in, the child order is rolled or, in the case of synthetics, both legs of the order the forward points are rolled on each of the individual child orders.
Drivers
Donner explains that the initial driver behind this new development was to further enhance NDF algo execution. “Our main motivation was to ensure we have a very robust product for trading NDFs, but in doing so we have created a very important new enhancement to all our algos. This includes spot algos that are rolled to a forward date. At some point in the future, clients will now not necessarily need to know where the liquidity is in the given currency pairs, they will not need to know is it a first future date, is it a spot date, is it one month. Instead, the client will see the improved performance of the algos neatly encapsulated in the data, in their TCA reports, which will give them the direct insight into their performance.”
This new approach has a number of advantages, notes Donner. Clients can now benefit from an average price over the lifetime of the algo on the forward points, while also hitting a top-of-book spread on points when executing which should result in tighter points. “The new methodology is also future proof, with new developments coming down the line such the new matching pools for FX swaps, enabling clients to execute algos on a greater variety of venues.”
EURUSD and EURCZK aggregate orderbooks. The visibly different EURCZK market structure can pose a challenge to traditional algos
Franchise Matching
In addition, the recent addition of a new way to internalise, called Franchise Matching, is also proving to be very beneficial in executing certain emerging markets’ pairs, not just G4 pairs as was originally expected, says Donner. Franchise Matching is a new method of working with Goldman Sachs’ ebook to bring internalisation to an algo. This causes the ebook to trigger a skew, that skew is then shown to certain skew safe clients to attract liquidity which is in turn used to fill the algo. “Even if there is not an offsetting position immediately available, this can create one,” Donner adds. “In some of the CEEMEA pairs, such as Czech/Polish, Franchise Matching has provided a considerable improvement to overall execution speed. This means the client in turn needs to take less market risk and the mark outs are very good. It is a very soft mark out form of liquidity similar to the dark liquidity that’s available via mid pools.”
