Do you have any new developments or enhancements to the FX algo suite which you would be able to share?
With the enhancement of State Street’s electronic foreign exchange Non-Deliverable Forward (NDF) pricing and hedging capabilities, we are pleased to announce our latest venture expanding our algo offering into the NDF space. Initially, we plan to offer NDF algos on the following three Asian currency pairs: Korean Won (KRW), Taiwanese Dollar (TWD) and Indian Rupee (INR). Clients may trade to any outright date, including broken tenors, and our offering will hedge the risk via one month liquidity. If necessary, points can be added on completion of the algo order to the desired tenor.
Our new offering concentrates on improving upon existing NDF algo products and addressing client concerns about those offerings. Some clients feel NDF liquidity pools and the venues supporting NDF liquidity are limited and that NDF algo execution is still developing. Others note many NDF algos function more as smart order routers that sub-optimally sweep liquidity or place limit orders. The lack of real-time volume data also raises doubts about the reliability of volume-driven strategies such as Volume-Weighted Average Price (VWAP) and Percent of Volume (POV). Our latest offering is designed to address these issues.
How have you tackled the persistent liquidity challenges that exist for certain NDFs?
Internalisation plays a vital role in NDF execution where liquidity is fragile. As our electronic NDF hedging and pricing capabilities have improved, we have seen an uptick in win rates within our asset manager community (currently ranked number one for NDF win rates with asset managers on a large platform). In our new algo offering, we harness this success and provide the same internalisation options that we offer in our deliverable strategies. We are also among the first banks to leverage our peer-to-peer matching technology (Interest Match) in the NDF algo space, including the ability to skew our streaming NDF prices to attract client flow. This is an NDF algo capability that is not yet available in other banks’ offerings.
Our extensive onshore presence in many NDF countries allows us to offer extra liquidity that few other providers can match. To illustrate this point, State Street has had a local presence in South Korea for more than two decades supporting global clients to trade KRW onshore. We were the first Registered Foreign Institution (RFI) to participate in the onshore interbank FX market in South Korea in January 2024, and our current status as one of the five leading RFI banks in South Korea gives us a significant edge. This recognition follows a rigorous evaluation by South Korea’s Ministry of Economy and Finance (MOEF), who made the selection based on performance across bidirectional spot FX, quote-based spot FX and FX swap transactions over the past year. With this designation, we are able to tap into the richest sources of onshore liquidity to create a synthetic one-month NDF price that is accessible via our NDF algo offering.
What is the significance of onshore liquidity in KRW?
The onshore market has substantial trading volumes with liquidity comparable to the current NDF markets. We estimate that by creating synthetic NDF liquidity from our onshore sources and proprietary curves, we can access substantially greater KRW NDF liquidity than other providers without onshore market access. This enables us to minimise market impact when executing large algo orders and enhance overall execution quality. The opening of the onshore market also provides extended trading hours, thereby helping our clients access the KRW FX market up until the close of the London market.
Do you support the same algos as deliverables?
Our NDF algo offering will be available on a majority of our FX algo strategies, including our flagship FLOAT (inclusive of the Implementation Shortfall and Percentage of Volume features), Time-Weighted Average Price (TWAP), VWAP and Sweep & Post. As we add more NDF currencies, we will also extend support to our Portfolio Algo. We will also be live on FX Connect, FXALL, BBG and On Behalf Of trading (OBO) and will continue to expand our distribution network to alternative platforms in the coming months.
