Standard Bank Group is the largest African bank by assets, operating in 20 African countries and 5 global financial centres. Headquartered in Johannesburg, South Africa, Standard Bank has a 157-year history in South Africa and started building a franchise outside southern Africa in the early 1990s.
The growth in algorithmic FX trading in many regions around the world is being driven by several factors including regulatory pressures to achieve best execution and a move towards more transparent and cost efficient trade execution. What issues are now really starting to influence the growth of algo FX trading in South Africa and does the country have any specific regional characteristics that make it a fertile and responsive environment for this type of trading?
The movement towards Algo FX trading for clients in the South African context, and in our own Standard Bank context is fairly new and has been spurred on by our more sophisticated clients who wish to reduce their costs of executions and have greater control of these executions. The increasing interest in algo FX trading in the South African rand can be attributed to the currency being fairly liquid (with illiquidity at times), whilst having enough spread unlike in some G10 pairs which are so liquid that the spread can be negative at times. These characteristics of the Rand make for a responsive environment for algo trading, particularly for clients who prefer strategies that avoid crossing of the bid offer spread.
South Africa has a diverse community of buy-side players, many of whom are technologically sophisticated. In what ways do they differ in how they are starting to utilise FX algos and what types of strategies are currently proving most popular with them?
South Africa’s diverse community of buy-side clients who are increasing in technological sophistication include large corporates, some of which have multinational operations, and non-bank financial institutions (NBFI’s). Although the different types of clients may have slightly different reasons for execution via FX algos, we have observed that the way the algo’s are utilized by the clients in the market is similar.
The most popular strategies are those which allow clients to reduce execution costs by earning the spread as in the case of passive and floating strategies, as well as strategies that are uncomplicated such as time based TWAP strategies for breaking down larger tickets which would have traditionally been done via risk transfer and voice.
In what ways has the arrival of new regulations and best practice guidelines in FX increased demand for new pre and post trade analytical toolsets by buyside firms in South Africa and what sort of metrics are they looking for?
The large multinational corporates are at times mandated to adopt operating models and risk management strategies like FX algo execution from locations under regulation such as MIFIDII for clients with operations in Europe whilst some of our NBFI clients may wish to use FX algo execution to demonstrate best execution for funds, or in anticipation of such regulations being adopted with South Africa.
The guidelines set up in the FX Global code are also an important factor for those who have signed it. These factors have increased the demand from clients for pre and post trade analytical tool sets. Clients typically wish to demonstrate best execution using the tool sets through metrics such as fill rates, market impact of the executions and comparisons between the algo execution price and the risk transfer price.
What do you see as the key value propositions of FX algo execution and how are you encouraging more of your clients to adopt it?
We feel that the key value proposition of FX algo execution is the reduction of market impact, and the reduction of market signaling or information leakage, when clients utilize the most appropriate strategies, at the right time. We are encouraging our clients to adopt more algo trading as part of their risk management, by regularly advising them of this value proposition along with the other value propositions of greater transparency, and greater control of executions.
We are encouraging clients to use our algo’s in particular, due to the superior liquidity we are able to provide for the executions. When clients opt to execute against Standard Bank liquidity, they have the benefit of matching with the interest generated from other clients in our large franchise, as we have the ability to show heavily skewed pricing to clients/avenues we have deemed as safe through analysis.
When clients opt to execute against the market directly (DMA), they will access specially curated liquidity based on our analysis of Liquidity Providers or tag’s participating on ECN’s.
What appetite is there amongst South African buyside firms for developing and building FX algos themselves or do they mostly prefer to utilise bank and other third party solutions?
Although the “build vs. Buy” decision is quite topical at the moment, we have seen very little appetite from buyside firms to build and develop their own FX execution algorithms. Building FX algorithms is not a trivial task, requiring significant effort from developers and Quants, as well as significant resources to maintain the algo’s.
The resources required would be much better utilized to invest in the development of the firm’s core competency or area of expertise. It is for this reason that we partnered with a third-party firm to white label their existing algo technology and strategies. The algo suit has been implemented onto Bloomberg as our pilot platform, in order to reach new and existing clients who wish to use the product.
How much demand is there from regional buyside firms for a wider spectrum of FX execution algos (such as NDFs) and how can the use of algorithms help to meet the requirements of firms who are undertaking multi-asset strategies which can often require more human input?
Our region is in the very early stages of the digitalization of some products like NDF’s and as such, demand (and availability) of these algo’s is low. NDF’s and the frontier currencies we mostly trade them in are also not yet liquid enough to be suitable for these types of executions.
What steps have leading banks like Standard been taking to avoid the stigma of “black-box technology” by making the workings of your FX algos more transparent and their specific design objectives easier to understand?
We are taking a few steps in ensuring that the inner workings and logic of the FX algos are known and understood by the client through the provision of documentation such as detailed user guide’s and through demo’s in which clients are encouraged to ask questions.
We have a governance process in place which provides a framework for us to source detailed information about the algo’s from third party providers, which helps us provide assurance to our clients.
How has Standard Bank been working to enhance and refine your existing suite of FX algo toolsets and develop new TCA and execution analytical solutions to assist clients?
FX algo trading in South Africa may pave the way for more of the sub-Saharan frontier currencies trading this way
Our FX algo offering is fairly new, (launched in June 2020), and so we are in very early stages of refining and growing the product. One of the key strategies of our organization is client centricity. Our aim is to enhance the experience of our clients rather than to push products that may not be valuable.
As such we wish to make decisions and enhancements based on the needs and requirements of our clients through client discovery and constant engagement around their risk management. From a TCA perspective, we feel that it is important to have an independent third party analyze client executions, and so we are working with a provider who is well versed in the TCA needs of buyside clients.
In what ways is the way FX algo trading is evolving in South Africa likely to filter out and shape the way this type of trading becomes more prevalent across the wider continent of Africa?
FX algo trading in South Africa, through an organization with a large franchise and expertise in the South African market, may contribute to the growth in popularity and success of this method of trading. This may very well pave the way for more of the sub-Saharan frontier currencies trading this way, when they become more liquid.