Jason, please tell us a little about your job and day to day responsibilities within Manulife.
My responsibilities are to oversee the US Fixed Income trading desk. This entails all sorts of activities on a daily basis from best execution oversight, liaising with other functions such as legal and compliance, to system enhancements and Manulife Investment Management public markets relationship management. I also am the primary FX trader for Boston. My main function here is to provide for the FX needs for the majority of the PM teams in North America. This function includes executing trades whether by voice or electronic methods, providing information and ideas to the PM teams, and working with sell side firms to create the functionality we need to create value for our clients.
In very general terms what are the key objectives of your currency dealing team?
Our FX team has two main functions. Best execution always comes first. We are always looking for the best possible avenue to execute trades which in today’s world is increasingly electronic. But I am a true believer that a desk should also be providing color and idea generation to the Portfolio Management teams. The Trading function is an important part of the overall investment process.
How much emphasis do you place on continually working to improve your technology stack and trading platforms?
We continually are looking to keep ahead of the trends in trading. As you know, technology and liquidity pools are always evolving. We try to tailor our technology to enable our traders to identify and execute what we believe to be the best outcome for our clients. We evaluate internal and external systems that can help streamline the entire lifecycle of the trading process.
Some traders are very ambitious with respect to FX automation and their final objective is “no-touch” fully automated trading with no human intervention. What’s your position on that and how far do you go along with the idea?
We are not currently using “no touch” trading. Virtually all of our FX trading is active position taking, so we don’t believe full automation would be the best choice. However, we are exploring no touch/rules-based trading for some of our smaller, passive flow. The key, to me, is to start very small to refine your rules of engagement for this type of trading and build upon that. Defining the correct rules is what adds the value for the “no touch” process.
When did Manulife start to explore the use of FX algorithms and how difficult was it to integrate them into your trading operations?
We started to use algos a few years ago. It was not hard to integrate them into our process. The difficult part was to really understand the nuances of each algo and to tailor it to what we needed. If you add up all the algos from all the brokers, there are dozens. Most broker offerings have the same basic functionality but can be utilized in slightly different ways. Understanding that is the most important part of the process.
What sort of orders are you typically executing via algos and what clear benefits are you hoping to get by doing this?
We use two basic types of algos: 1. Fast – sweep the book. Very active 2. Slow – Passive, cross the spread type of algo. Within the slow algo, we focus on counterparties that give us the ability to intervene and take liquidity when we choose. This gives us the flexibility to have more control over our orders and transact at a pace that we decide.
What are you particularly looking for in terms of the functionality that FX algos can offer?
As stated previously, we are mostly trading active positions on algos. Providing the flexibility to intervene while an algo is running is the most important feature to us. We currently have a handful of providers that contain that functionality.
What factors might influence the sort of FX algorithms you employ?
When working an order, our traders must first decide if an algo is appropriate for the specific order. Order size, currency pair, liquidity, current market conditions, urgency of the order are all factors that go into the trader decision to use an algo, and if so, which algo to utilize.
across 17 geographies.
To what extent does an understanding of market dynamics and liquidity influence the decisions you take on how to deploy an FX algorithm and the execution style that may be most appropriate?
Understanding market dynamics is the most important function of a quality trader. When I first got into the business everything was voice. You gave your order to the sell side and price discovery was much more opaque. Anyone who had a Quotron machine in the 90’s can remember that. Today the amount of information is vastly improved. Quotes are updated continuously, the amount of pre-trade information is overwhelming, and the way a trader can execute runs the gamut from very passive to instantaneous. A great trader must be able to analyze the vast amounts of information and data quickly to be able to achieve the best outcome for the client. Assessing the liquidity landscape to decide how to execute a trade is an extremely important part of a trader’s success.
How “hands-off” are you prepared to be once you have committed to using an algo or do you still like to micro-manage various parts of the execution process or at least constantly monitor it?
We are very hands on when it comes to running algos. We are not a “set-and-forget” type of shop. Our objective with algos is to have access to as much liquidity as possible, but also have as much control over the order as we want. Sometimes it is to quietly cross the spread in a low vol market. Other times it is to access as much liquidity as we can up order size. However, most of our algo usage falls somewhere in the middle.
How do you source the FX algorithms you use and what sort of information about their capabilities and performance attributes are you seeking from providers?
We use sell-side bank algos. While we don’t develop our own algos, we work with the sell-side to create the functionality we need to help provide the best outcome for our clients. For us, the goal of the algo is to access the liquidity we need without moving the markets. When looking at TCA reporting from the algo provider, I focus on the benchmark performance for the trade. I also like to focus on where the liquidity was executed (internal or external). Internalization is an important benefit of using algos. It helps to minimize information leakage and thus leads to better performance.
Some firms rely on their own internal TCA toolsets to improve their algo trading styles and platform setups whilst others work with external independent third-party TCA providers. How do you approach this?
Manulife Investment Management utilizes third party TCA providers to create our TCA reporting. Over the last five years, this data has improved greatly. We analyze this data to look for trends where we can improve our processes. Whether it is looking at trader performance, broker performance, pair performance, algo performance, or a combination of all, we analyze ways to enhance the outcomes for our clients. Used in the correct manner, the data provides lots of useful information.
How has the way you work with FX algos changed since you first started deploying them? For example are you trying to make their selection more systematic?
If you are talking about using an algo wheel for FX trading, we do not. As we started using algos a few years ago, we would log all sorts of data about market conditions and our outcomes for any algo we executed. This gave us a crude benchmark of expectations for each algo we used. We looked to see which algos fit what we were looking for and which did not perform to our satisfaction. This gave us a core group of algos which we could focus on having developed by the sell-side or could tweak to fit the current market environment. I would not call this systematic, but more of a systematic approach. At the end of the day, it is the trader’s job to choose the algo they feel will provide the best outcome overall.
How much has the Covid-19 pandemic and working from home environment acted as catalyst for your team to increase their level of trading automation including the use of algos?
Manulife Investment Management was already into algo usage before COVID-19 hit. It was a valuable tool in our toolbox of execution levers. When COVID-19 sent everyone home, algos proved to be invaluable. I have always believed that in times of high volatility, voice trading would be the best available option in the FX market. I never factored in the fact that the entire industry would be working remotely. With the fractured nature of liquidity, we have found that algo trading has been a great way to execute trade without market impact. We have increased our algo volume dramatically as a result. This has mostly come at the expense of RFS streaming prices, and to a lesser extent, voice trading.
Looking to the future do you expect execution algorithms to play an increasingly important role in Manulife’s FX trading operations?
I expect algo trading will continue to be an important tool for traders to use globally. I would expect the percentage of our volumes traded electronically to continue to go up over time. The amount that is made up of algo trading will vary as it has over the last 18 months. I do not expect that we will ever be 100% electronic. I am a true believer in a mix of execution styles that fit the current environment.
