The Gateway to Algorithmic and Automated Trading

Sellside Round Table

Published in Automated Trader Magazine Issue 22 Q3 2011

After Q2’s fascinating discussion of the distinct characteristics of FX algo usage, evaluating the critical differences between FX and other asset classes in this respect, our sellsiders move on to discuss FX algo development and the prospects for FX algo functionality that will accommodate multi-asset strategies.

Joining us at the

Cameron Mouat - Head of foreign exchange algorithmic execution, Deutsche Bank

Gary Stone - Chief Strategy Officer, Bloomberg Tradebook

James Dalton - Director of FX Algorithmic Execution, Citi

Jonathan Wykes - Head of AES FX Sales EMEA, Credit Suisse

Which are the most critical trading venues to which FX execution tools must be connected to be competitive?

Cameron Mouat: There is a core set and they are fairly well known. In addition Deutsche Bank has a large pool of clean liquidity which is independent from other venues.

Gary Stone: We have created our relationships to grow our FX market place's ecosystem. As a result we have created a deep liquid pool and this enables us to be partners with the liquidity providers and liquidity takers so that both sides win. Therefore, we know exactly what we can do in our market place. However, we realise that not everyone in the FX market has the technological ability to operate this way so we have developed technology to include others.

James Dalton: There is a primary liquidity pool for each currency pair. Obviously Commonwealth and EM currencies are traded mainly on Reuters, and Euro Dollar and Dollar Yen are EBS centric. This may not remain the case for ever, as firms like the CME and Currenex are continually eyeballing these enviable brokerage businesses while investing millions in technology to try and build the functionality that will attract clients away. The ground is shifting fast and when the market is busy it is not always the primary markets that see the most volume or the first flurry of activity. We are also yet to clearly understand how pending regulatory decisions may impact where we trade.å Again I would mention that the top tier of electronic market making banks and their internalisation capabilities make them a vital cog in the liquidity landscape.

Jonathan Wykes: It's important to have all the standard primary venues (inter-bank), and ECNs. If you are trading in the majors then you do need to have all of those set up.

One thing that we have done, that has been key, is the use of Cross Finder which is very big in the equity space. It's essentially an internal matching system for all our client activity. We have been actively developing that, taking in liquidity from more local sources and crossing more and more customer to customer flow. This is important because when you start trading illiquid currency pairs there is only so much that you can do in the market. You can obviously get good executions but if you can trade without going to the market as often then you are going to have less impact and less impact means that you can give a much better execution to your client. The key is to have a very diverse pool of liquidity rather than lots of liquidity that really can end up being magnified.

Cameron Mouat

Cameron Mouat

How do the various buyside segments vary in their demand for and use of FX execution tools?

Cameron Mouat: Real money, corporates and larger hedge funds are predominantly interested in anonymity of execution, minimising market impact as well as execution performance. Smaller hedge fund prop desks use algos more for the functionality and execution performance.

Gary Stone: If you take the buyside you have the hedge funds, the asset managers, the corporates and they are all looking for something a little bit different. Hedge funds, as we discussed before, seem to be technical in nature. They tend to use algos that help them build positions or set up entry and exit, trailing stops and setting up event-driven trades that key off different market data. We are seeing more and more asset managers start to dabble in some of the scheduled TWAP or wave algorithms to manage the FX exposure arising from their foreign equity activities more efficiently. A few have started to use average price algorithms which seek a limit which is an average price - a soft limit rather than a hard price limit. Corporates like to do outrights, so we developed technology that enables them to seek best execution on their spot transactions, using similar tools to the asset managers, but automatically roll it forward.

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