Gressel began with an overview of the main challenges facing FX algo providers during the crisis, with the biggest challenge coming from the external influences that they witnessed over February, March and also into April to some degree. While leading investment banks such as UBS had detailed business continuity plans, Gressel noted that these plans had not needed to be fully tested for more than a day here or there and certainly not to the extent we’ve seen, particularly in March, where market volatility added to the additional strain. “If you think of our business, we have a group of sales traders globally who monitor the FX algo flow and the client business. Now, if you are now trying to relocate those people to backup sites and to working from home situations, you can see how capacity very, very quickly becomes a little bit of an issue or a strain and working environments change dramatically,” he says.
In addition, Gressel noted the loss of quick interactions and the physical contact gained from being in the office environment. Yet overall, taking into consideration how volatile the market was and how much volume was actually traded during that time, Gressel says that the business weathered that period very, very well and he was amazed at how few problems they encountered.
McMurtray agreed with Gressel and echoed his own experiences of the sudden loss of an office environment where there’s so much cross pollination and collaboration, which he adds can really impact the way that things get done at T. Rowe as even with WebEx, Zoom calls or chats via Symphony, that contact is still a spectre of its former self. Even so, he agrees that on the whole, they were pleasantly surprised as far as business continuity was concerned. An audience poll taken during the conference day also found that 100% had experienced a seamless transition to working from home during the crisis.
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Calls for better functionality
However, one major concern McMurtray found was the lack of flexibility available from their providers. “This was an issue that we had previously, but was certainly exacerbated in the higher volatility environment, specifically having the ability to partially fill an FX algo, mark the portion traded as complete and carve out the balance. We had a number of situations where trades either ran away from us or, you know, market news came out and we decided that we needed to change tactics. But our current provider couldn’t support this, which was definitely a detriment that we saw that was kind of highlighted in this environment,” he explained.
McMurtray looked forward to the provider releasing the functionality which will allow users to trade an algo part way through, effectively mark the portion that they have traded as complete and then carve out the balance and trade it via a different mechanism, either via voice, RFQ etc. As of the writing of this article, this has been made available. Aside from that, McMurtray added that the extreme widening of spreads and market volatility did drive T. Rowe Price to reduce its RFQ trading in favour of other execution types. “When we couple this with a significantly higher internal volumes that we saw, as well as an elevated demand for execution flexibility from our traders, FX algos did become an increasingly important execution tool for us,” he says. “During the crisis our algo usage definitely did increase on an absolute basis.”
In terms of strategies, McMurtray says they continue to favour opportunistic strategies, although there has been some additional uptick in the usage of internal only or non-displayed strategies throughout the crisis, at the expense of more purely passive or pegging based strategies. He explains: “We did find that these pegging strategies tended to underperform in times of volatility and trending markets, especially given their asymmetric payoff. When these trades were moving against us, they would have filled slowly as no one would come in from the other side across the spread. And then on the flip side, when they moved in our favour, they would fill too quickly and not benefit from the market movement.”
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Gressel says that UBS had also seen a general increase in algo usage and the use of more opportunistic and urgent strategies by clients. In turn, he says that one of the main takeaways from the crisis is the need to consider much more flexibility around the parameters that are going into the FX algos. “Before this crisis, although we have seen volatility, we haven’t seen those intraday and very short term changes – not just for a single event, but actually being in place for a couple of days and literally changing the environment that we’re in for a few days or a week. So that was something that we definitely have looked into and that we learned that we needed to adapt much quicker to,” he adds. On the algo front, McMurtray adds that he believes this crisis will drive further integration of real-time market conditions within the algo ecosystem. “So whether it’s on the execution side itself or on the analytics and execution decision making side, being able to adapt to changing market conditions will be crucial to minimising some of the tail events that both Christian and I referenced. Algos have been, and continue to be, an excellent tool for the buyside to be able to capture spread and achieve cost savings versus risk transfer,” he concludes.
On 22nd and 23rd September 2020 the Tradetech FX organisers are holding an invite-only Virtual Forum for FX leaders to benchmark their COVID-19 recovery strategy.