Buy-side focus on FX exposure will drive development
BidFX is building a wider range of execution tools and adding more algorithms to its platform, as the firm believes they will play a bigger role in the foreign exchange market, says chief operating officer Alan Dweck.
The move is driven by the buy side’s demand for better means of execution, while there is a decreasing appetite for risk on the sell side. “Over the years, there is a kind of mismatch going on between long-only managers trading for their investments and the way they then cover their FX exposures,” says Dweck.
The suite of tools is aimed at making long-only asset managers’ or sovereign wealth funds’ FX executions more efficient and streamlined. It will help them automate and optimise a lot of their execution, while ensuring best execution. In addition to the execution tools and automated routing capability, the toolbox contains complex shaping and netting tools that allow orders to be optimised pre-trade.
“Asset managers, in the equity world, are fighting over tiny price improvements, trying to get absolutely the best value they can for their investors,” says Dweck. “The irony is that they then allow massive price movement against them on their FX, which sometimes seems to get covered almost as an afterthought.”
Buy side demands algo power Asset managers, particularly long-only, will pay more attention to their FX exposures in future, and this will require better execution tools and more advanced algos, Dweck continues.
In October, Nomura made its five FX algos, collectively known as the Tsuwamono Series, available on the BidFX execution-management system. Since the Nomura deal, there are currently algos from 18 banks live on the platform, with four more to onboard, the firm says.
Improving the management of FX exposures could help boost the performance of the buy side, he says. “If they were to analyse it a bit more closely they would see that the amount they are fighting for on the equity trade is completely insignificant when compared to what they allow to slip away through the inefficient trading of their FX,” Dweck says. “The only conclusion that could be made is that they should look to trade FX far more efficiently in order to provide better value to investors.”
Decreasing appetite for risk on the sell side is another driver of algo development, says Dweck: “More of the sell side are acting as quasi-agency brokers. The result is that they are all encouraging their buy-side clients to take on more of the risk and thereby giving them tools to work their larger orders themselves.”
The trend suggests buy-side players who have large volumes to trade will seek better ways of executing, rather than a simple risk transfer.
“That is where these algos come in and that’s why they are starting to gather momentum,” says Dweck. “The experience of many of our clients is that slicing and dicing large orders across the marketplace in different ways achieves far better overall results.” For instance, in terms of distributing big orders throughout a trading day, time-weighted average price algos can allow traders to break down larger chunks into smaller pieces and either execute over a period of time or execute passively as opportunities arrive.
The same logic also applies to the non-deliverable forwards (NDF) market. “It’s just harder to execute in the NDF market. Therefore, it’s harder to build the algos,” says Dweck. “In response, we are now providing our clients with a set of order tools that lets them slice and dice all order types, including NDFs and swaps, into the marketplace.”
The trading platform also plans to onboard more NDF algos in the future.
This article first appeared in FX Week, 6 Dec 2019.
