Please share more details about what the new algo is?
State Street is very excited to announce the launch our new strategy – the Portfolio Algo. This strategy is designed to execute a portfolio or basket of orders across various currency pairs. This innovative solution will help navigate the complexities of executing multiple currency pairs simultaneously, and reduce overall execution costs when compared to executing each currency pair individually.
Another goal of the strategy is to enhance efficiency of the buy and sell netting opportunities in the basket orders by breaking the legs into tradeable, netted orders. We then optimize the trade-off between cost and risk of the aggregated execution. We do this by analysing the characteristics and correlations of the netted currency pairs to generate optimal execution paths for each pair. These cost and risk trade-offs can be reviewed on our pre-trade analytics tool. During execution, clients can monitor the execution of each leg with our real time TCA. Post execution, clients will receive additional TCA analysing the performance of each of the netted legs, as well as the aggregated performance against the initial portfolio orders.
What do you think are the differentiating features of your portfolio algo?
State Street’s Portfolio Algo is more than just a workflow automation solution. The strategy computes optimal execution trajectories by modelling temporary and permanent market impact cost, volatility cost and the cross-correlations of different currency pairs. These trajectories aim to minimize the mean-variance of the Implementation Shortfall cost of the basket (i.e. reduce slippage from the arrival price of the portfolio). We construct an efficient frontier based on different levels of risk aversion. Each point on the frontier represents distinct execution pathways designed to optimally liquidate the basket on an aggregate level.
An important concept leveraged in the Portfolio Algo is the efficient frontier. The structure of the efficient frontier is expressed on two ends of the execution spectrum: executing everything now, at a known but high cost (e.g. aggressive sweep or risk transfer); versus executing a simple, evenly distributed strategy slowly over a time horizon (i.e. TWAP) at an unknown, but low expected cost. Our Portfolio Algo pre-trade analytics allow clients to observe the transition from one extreme efficient frontier point to another and shows how we can reduce the expected costs with only small increases in standard deviation. This allows our clients to express their varying risk profiles by choosing different urgencies. Once an urgency is selected they will be able to review the execution paths before executing the portfolio.
Another differentiating feature is the flexibility to constrain the basket USD exposure to its initial levels, or to be completely USD neutral. It is inherently challenging for a human trader to manage multiple legs of currency pairs with different risk and cost characteristics while maintaining, balancing or neutralizing the USD exposure of the original order. State Street’s Portfolio Algo is able to derive the optimal execution pathways of the different currency pairs and ensure desired constraints are observed throughout execution.
Can the algo be customised to allow clients greater control of their executions?
Absolutely. The Portfolio algo, while sophisticated, is designed to easily deploy. Clients can let the algo decide the duration to run the order, or for clients who desire more control, they will be able to select their own duration and urgency. Once these customized selections are made the strategy will optimize the basket orders on an aggregate level based on client inputs. We understand that clients also like the flexibility to stay engaged at critical moments similar to our flexible design of our single order algo strategies. The portfolio algo offers the ability to amend basket orders details, speed up/slow down execution, add/remove limit prices and pause/resume individual legs or the entire basket. The client can also manage particular legs of the basket individually by using any existing strategy in our algo suite or through a risk transfer price. If any of these flexible tools are utilized the portfolio algo will be able to adjust and recalculate the optimal execution curves in real time to accommodate changing parameters.
Why did you develop the new algo?
We maintain a consistent dialog with our clients, listen to their execution needs and partner with them to find solutions. The Portfolio Algo was built based on increased demand, interest and feedback from our clients who wished to simplify their workflow and optimize the cost of trading a basket of currency pairs.
Client experience is a key theme to State Street’s FX algo offering. We actively engaged with our clients to develop this new strategy. From gathering essential requirements, to reviewing the concept and design of the model and workflow, we built the Portfolio Algo to ensure the solution can provide additional value.
What has been the response/ feedback? Has it been well received?
The offering has been very well received. During recent walkthrough presentations we received tremendous interest from clients eager to try the new strategy.
During a recent global algo tour several of our clients, who have yet to adopt FX algos, commented that the Portfolio Algo is a “game changer” for them.
In what ways will the new strategy benefit clients? Are there particular groups of clients who will find the algo especially effective?
A consistent pain point for our core Real Money client base occurs during monthly and quarterly portfolio rebalance and asset allocation trades. Managing multi leg, multi-currency trades is time consuming, gives rise to in-efficient execution, increased implementation shortfall, and operational headaches.
The Portfolio Algo is specifically designed with these challenges in mind and solves them with essentially one click that can save our Real Money and asset manager community countless hours and reduce execution costs
