FX Algos set to proliferate - FXAlgoNews
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ISSUE 10 | MAY 2018 WWW.FXALGONEWS.COM FOLLOW US AT:
FX Algos set to proliferate
to adoption. After assessing all these
factors, Greenwich Associates projects
that algorithmic trading will continue
to proliferate in global FX markets.
A new report from Greenwich report: The Evolution of FX Algos:
TOP STORIES
Associates has found that From “Nice to Have” to “Need
approximately 20% of institutional to Have”. With the push from
foreign exchange trading volume regulators, as well as best execution
is now executed via algos, and FX committees and policies, traders are
is likely to move steadily in the going to need to reduce costs while
direction of equity markets, in which maintaining (or improving) the
“algos” account for more than half quality of the execution. Algos help
of trading volume. with both, he states.
“With all of the data available The report analysed how traders are
demonstrating the benefits and employing algos, how fees impact
cost savings, the ability to execute a their decision-making, and what
trade with an algo will soon become steps institutions need to take to
a ‘need’ as opposed to a ‘nice to start using them. It also looked at
have’,” says David Stryker, Principal the question of why algo use hasn’t
with the Greenwich Associates grown even more rapidly in FX and
David Stryker
Markets team and author of the identifies some of the key barriers
Goldman Sachs launches new FX analytics tool
Algos are a growing part of Goldman The bank has recently launched an even performance relative to their
Sachs’ overall FX business with analytics tool offered on its platform benchmark. We intend to change all
volumes having increased by some Marquee Trader, which is designed that,” says Donner.
30% year on year. The philosophy has as a real-time order monitor for FX
always been to have a manageable orders.
group of FX algo strategies, which IN THIS ISSUE
include a flagship dynamic hybrid Clients using vendor platforms are
algo, a pegged algo that does passive often “flying blind” when using
posting, a dynamic aggressive for a an algo, explained Ralf Donner, n p6: REGULATORY ISSUES
sweep-to-fill capability, as well as the executive director and global head of Will good practice make for better FX algos?
standard TWAP and VWAP. FX Client Algo Execution at Goldman --------------------------------------------------------------
Sachs. “They typically do not have an
n p12: FXALGO INTERVIEW
With Ronald Lagarde at APG Asset Management
instrument panel in front of them
--------------------------------------------------------------
by which to figure out exact details n p20: BUYSIDE PERSPECTIVES
of live performance of the order Algo trading in the corporate treasury environment
execution,” he said. “And while pre- --------------------------------------------------------------
and post-trade tools are ubiquitous n p26: EXPERT OPINION
in the market, the space in which our Best execution: what role do FX algos play?
real-time order monitor launched --------------------------------------------------------------
in late April is wide open.It will n p28: REGIONAL SPOTLIGHT
allow clients to visualize execution The Nordics - A fertile algo trading ground
intra-trade and make tweaks to it, --------------------------------------------------------------
and adjustments as they see the
n p36: TRADERS WORKSHOP
Data - Why it’s time to commit
performance,” Donner said.
--------------------------------------------------------------
n p38: EDUCATION & TRAINING
“Without an intuitive intra-trade tool, QuantInsti - Helping aspiring Quants
clients are likely to be in the dark --------------------------------------------------------------
during the actual execution, especially n p40: A-Z OF FX ALGOS
Ralf Donner about live liquidity conditions and A popular old friend - Revisiting TWAP
May 2018 1
Six new FX algo strategies from Nordea
TOP STORIES
Nordea is launching a suite of six FX algo strategies this ability to customise a few of the parameters.”
summer. Scandinavian institutions, said Kasper Folke,
Nordea’s head of e-FX, have increasingly moved away Looking at medium and small corporates, Folke noted
from principal risk transfer towards execution algos. that there is preference to hedge as a principal risk
“Some clients are using algos to find new ways of transfer. One of
Execute trades exactly
proving best execution, while other clients utilize algos the reasons for that
as a means to improve execution quality and reduce is that such clients
the overall cost of trading FX,” he said. Nordea’s FX are focused more
algo customers tend to be large institutions – pension on non-FX related
how you want to.
and insurance funds as well as asset managers. But the hedging strategies.
largest corporates are also on the radar. What they have “It depends on
in common is that they prefer to use FX algos optimised how advanced the
for Scandinavian markets, leveraging on Nordea’s corporate treasury
unique liquidity. function is, and if
they have in-house
Trade like a professional
One of Nordea’s FX algos, named Make, for example, is knowledge, and
a passive liquidity providing algorithm that will never significant flows,”
market maker.
cross the mid-point of the spread. “We have all the explained Folke.
necessary algos from passive to aggressive,” Folke said.
“Most Scandinavian clients have the highest interest See more
in benchmark-oriented algos like TWAP or VWAP. The information about
demand is for an easy access to a suite of algos, with the Nordea on page 28. Kasper Folke
Unlock a powerful combination of
flexible, easy to use algorithms
backed by a sophisticated market
Societe Generale goes
pair from different banks. “It’s a good statement of
making engine used by Tier 1 banks. confidence in your algos to say we stand by what we
do. We are proud of the performance, and, not only are
independent for TCA we happy to submit it to independent verification but
we use the products of that independent TCA company
to monitor and tweak all our algos,” said Hill. This also
Societe Generale is a relative newcomer to the FX algo answers questions like: should certain liquidity pools be
space, having been active for about two years. Since excluded from different strategies in different currency
Handle sweeps and market then the bank has seen a huge growth in demand pairs as a result of information leakage into the market
from one data pool versus another?
volatility efficiently. across a client base that comes from the hedge fund,
real-money, and corporate communities in the US and
Europe. The bank has three main algos: TWAP, or an
averaging algo; stealthy, named after the bird, Nightjar;
Choose from both passive
and aggressive algo called Falcon. Keith Hill, global co-
head of e-FX sales at Societe Generale describes it as a
and aggressive strategies: “streamlined” approach.
adapt the level of aggression, “There is a temptation out there to make a huge
selection of algos with all the bells and whistles that
amount executed, and specified sometimes have the tendency to confuse clients,” Hill
said. “What we’ve done is added a certain amount of
urgency to suit your requirements. customization so that clients can fine tune them to get
the best result.” The aim of the FX algo service, said Hill,
is to continue developing flexibility to allow clients to
be more hands on with execution, as well as to provide
White label option: constantly refined analytics enabling them to make
better decisions as to which algo to use under which
save time and money by putting market conditions.
your brand to our proven technology. One of the ways Societe Generale is doing this is by
engaging an independent TCA provider, BestX.
The bank already offers an in-house TCA suite, which
it tries to make as neutral as possible when comparing
market performance. But it’s still based on internal
data only. In using an independent TCA provider, clients
can compare algo performance in a specific currency Keith Hill
support@mahifx.com 0203 397 1825
2 May 2018 May 2018 3
NatWest Markets is keeping Deutsche
NEWS FEATURE
PEOPLE MOVES
FX algos clean and simple Bank’s new
Keeping their bespoke liquidity pool clean while making FX algos more flexible is one of
NatWest Markets’ goals for its corporate and financial institutional customers who require
global head of Your source for all the
latest industry news and
spot FX from the wholesale markets.
Historically, use of algos have been desks and client flow. “That’s
FX algos talks market commentary on
led by traditional fund managers,
but hedge funds looking for passive
execution and corporates have
increasingly been using them,
leveraging our client base across
corporates and financial institutions
who are crossing the spread,”
Quayle explained. When an algo is
market trends algorithmic FX trading
said John Quayle, head of FX algo initiated it will place orders, mostly After some 14 years at Deutsche Bank, Vittorio Nuti
execution at the UK-headquartered passively, in the COMS liquidity recently took over as global head of algos in FX and LD
bank. Corporates have generally pool. “It then becomes part of our based in London. It’s been a varied career since he’s
been more interested in RFQs or two-way price shown to our client joined. Nuti spent almost five years in Sydney and has
the risk transfer price, but seeing base only. So, when one of our John Quayle now been in London for nearly five years. Over the last
they will, on average, get a better clients crosses the spread, the algo decade he has moved through options and spot with
fill with an algo is bringing them gets to fill the order,” he added. an initiative to make algos more voice execution and developed the e-options business
around, he noted. Similarly, hedge This also allows NatWest Markets to flexible, so clients can switch before moving into the electronic space. The industry
funds have moved from simply keep the algos simple: “We don’t between various modes. And trend, he said, is towards algorithmic execution, whether
wanting to get a trade done, with have to place at external venues though the most common mode it be for large trades or systematic trading firms, like
little interest in taking market risk, and that means we don’t have the is passive using the liquidity pool, CTAs. And though
to using passive algos. complexities of doing so.” sometimes clients want to be more CTAs tend to use
Still, FX algo uptake remains The challenge, however, is keeping aggressive and sweep the markets. algo execution, in
dominated by the big buy-side the liquidity pool clean, and one of “The changes we are making will general, the market
like pensions, insurance and asset the ways the bank does this is by not allow users to switch more easily is shifting to a
management funds, Quayle noted. showing algo orders to any client from one mode to another without “partnership” with
The demand trend across clients is to where they detect undue market having to stop one algo and start their bank. What
minimize market impact, he said. impact. For its more sophisticated another,” said Quayle. “It’s really clients are looking
applications of technology, NatWest about ease of use, keeping the for from their
For this, NatWest Markets’ clients Markets focuses on monitoring the transparency from the client’s liquidity providers
use the Client Order Matching market impact of activity rather perspective whilst giving them the is to understand
System, or COMS, to execute in a than building “ultra-complex” flexibility to decide how best to the costs of foreign
liquidity pool comprising internal algos, Quayle said. There’s also complete an FX trade.” exchange execution:
what is the
opportunity cost?
Should I utilise an
algorithm?
“Those are the
difficult questions Vittorio Nuti
that the industry
as a whole is trying
to answer, and I think those are the key trends for the
coming 12 to 18 months,” he added. Deutsche is still
finalising some of its development plans as it assesses
the industry landscape, said Nuti, but one thing’s for
sure: the bank is intent on maintaining its segregated
structure between desks. “Clients want to have an algo
desk that is functionally separate to the principal desk
and that’s the structure that we’ve had in place for some
years, and we don’t see that changing.” That’s because
anonymity in execution is one of the key benefits to FX
algos, and the structure keeps anyone outside of the
algo team from knowing a parent order and which firm
Delivered to you at:
is behind it. In operation a few years now, Deutsche
is targeting strong growth prospects for the FX Algo
www.fxalgonews.com
Product by making significant investments in that space,
Nuti said.
4 May 2018 May 2018 5
REGULATORY ISSUES
Will good practice make
for better FX algos?
By Chris Hall
Algorithms have enjoyed As in the equities markets, (FCA) recent guidance statement,
persistent growth in the FX growing FX algo use has been which both clarifies and builds on
markets in recent years. And accompanied by concerns over MiFID II.
all the signs are for continued systemic risk, and efforts by
expansion, with more buy-side regulators to ensure algos are FCA GOOD PRACTICE GUIDELINES
firms appreciating their ability being used safely and effectively. In February, UK regulators
to reduce trading costs and With human-controlled trading outlined their expectations for
improve execution quality across giving way to faster and supervised firms in terms of
an increasingly fragmented FX more automated methods, algorithmic trading. The FCA’s
universe. the regulatory framework is ‘Algorithmic Trading Compliance
adjusting to account for new risks, in Wholesale Markets’ report
In a recent Greenwich Associates prompted partly by events. identified areas where current
survey, almost 60% of buy-side The FX market has not suffered practice is insufficient to meet
institutions reported that algos a shock comparable to the US their obligations, specifically
had lowered their FX trading costs. equities ‘flash crash’ of 2008. But under MiFID II. In parallel, the
This suggests the widening of sterling’s sudden 9% fall against Prudential Regulatory Authority
algo use from sophisticated active the US dollar in October 2016 and (PRA), responsible for prudential
traders and hedgers to the passive the derailing of many algos by supervision of the UK financial
mainstream is well underway. the unpegging of the Swiss Franc sector, published for consultation
Greenwich asserts algo execution in January 2015 have stiffened proposals for governance and
will rise from the current 10% of the resolve of regulators to risk management of algorithmic
all client-to-dealer FX volumes strengthen safeguards. trading.
over the next two to three years,
driven by regulatory initiatives Numerous initiatives – some Taken together, the papers
and the increasing best execution voluntary, others mandatory – underline UK regulators’
expectations. “We anticipate are shaping algo development intense supervisory focus on
meaningfully more volume will and deployment, but perhaps the potential systemic risks of
be executed via algos in the near the most significant is the UK increased algorithmic trading.
term,” the report concludes. Financial Conduct Authority’s Based on reviews of firms’ current
6 May 2018 May 2018 7
arrangements, the FCA’s review spot forms a reference input to integrity, the FCA explicitly notes algorithms work, with separate testing and production
REGULATORY ISSUES
says firms must address failures in instruments covered by MiFID II. that the report’s examples of good environments, as well as the ability of the compliance
five areas: definition of algorithmic Algo users must address the gaps practice are not the only ways to team to monitor algo performance in real-time, separate
trading; development and testing between reality and required practice comply but warns that poor practices from the algorithmic trading department. Much of this
processes; risk controls; governance quickly. PRA-regulated firms in outlined show where firms “now is current practice, in theory. But the combined effect of
and oversight; and market conduct scope of the Capital Requirements need to do further work”. “The FCA raising the bar and adding new requirements pose some
(these priorities are largely reflected Regulation and UK branches of third- document moves on from MiFID II stiff challenges, including the following:
in the PRA’s governance framework). party firms will need to comply with by emphasising the importance of
proposed PRA standards from 30 trading in a fashion that does not Defining / documenting – According to Charles Mo,
Notably, the PRA’s draft supervisory June 2018. Firms regulated by the threaten market integrity. This is in GreySpark’s head of trading solutions and infrastructure,
statement will apply to all algorithmic FCA (including some not defined line with IOSCO’s direction of travel defining and documenting algorithmic trading
trading activities “including in respect as investment firms under MiFID II) and has started to be reflected in processes within a coherent governance framework
of unregulated financial instruments should not expect an extended period other major jurisdictions. In the is a considerable challenge, despite overlaps between
such as spot FX”. Whereas MiFID II of grace, based on the regulator’s long run, firms won’t be able to equities and FX algos. At base level, firms have been
does not apply explicitly to FX spot, practice of enforcing rules rigorously avoid their responsibility to preserve gradually filled in gaps between policies drafted
many firms have decided to include after specifying best practice. market integrity by leaving Europe,” centrally to meet regulatory requirements and the
all algorithms within projects to says Nick Idelson, technical director Defining and documenting algorithmic trading processes procedures and controls created and implemented
overhaul their algorithmic trading Underlining the need to minimise and co-founder of specialist vendor within a coherent governance framework locally.
operations, in part because FX risks and avoid threats to market and consultancy TraderServe. is a considerable challenge
“Particularly where equities was an established business,
MIFID II: BEYOND BEST EXECUTION from an algo perspective, many banks already had deep
MiFID II’s best execution rules (RTS 27 and 28) are already if incomplete levels of documentation, but the approach
ALGORITHM INVENTORY DEVELOPMENT & TESTING having a significant impact on buy-side trading practices, was not necessarily scalable across other asset classes.
Firms need to establish and maintain a
FRAMEWORK especially in markets such as FX where execution
performance was traditionally subject to less intense
In many cases, the existing documentation has not
provided the head of risk with sufficient transparency
comprehensive inventory of algorithmic trading scrutiny. Increasingly, all the executions conducted by and confidence that controls implemented on the
All firms engaged in algorithmic trading need to
strategies and systems across the firm. institutional trading desks are being accorded similarly ground are fully aligned the firms’ policies. Those gaps
maintain an appropriate development and testing
high levels of attention. As such, common equities market have to be filled,” says Mo.
framework, which is consistently applied across all
relevant aspects of the business. tools and techniques such as algos and transaction
GOOD PRACTICE cost analysis (TCA) are becoming more commonplace MiFID II requires firms to certify and categorise
Firms who retain a detailed inventory across in FX and fixed income, to prove compliance with best different types of algorithms, due to the broad range
the business, with documentation which GOOD PRACTICE execution principles. of applications and programmes in the trading process
clearly sets out: Firms who maintain a robust development and
testing process supported by: “As well as regulatory factors, pressure from stakeholders
• the different types of algorithms, trading is also driving greater buy-side adoption of algorithms
strategies and systems, including relevant • appointing a project lead with responsibility and analytics in pursuit of best execution in the FX
operational objectives, parameters, and to oversee the entire development and testing markets. Activist shareholders and senior managers
behavioural characteristics process and ensure consistency expect trading desks to minimise performance drag
• a breakdown of the various components/ • breaking down the development process into through data-driven decision-making. Together with
algorithms contained within the strategy separate phases in which firms are able to increasing liquidity fragmentation, these factors will only
or system establish independent checks and balances at increase use of FX algos,” says Ollie Jerome, co-founder of
• the owner and those approved to operate each stage, particularly where subjectivity is used BestX, an analytics and technology provider.
the strategy or system • ensuring thorough due-diligence is completed at
• policies on the completion of the start (and at key milestones) of the process, But MiFID II’s RTS 6 and 7 are the key sections when it
development, validation and testing to ensure that any conduct risks are effectively comes to how firms should ensure their algorithms are
procedures, along with appropriate sign assessed and suitable risk control thresholds are sufficiently well designed, tested and documented for
off from senior management and other established use in live market conditions. These build on ESMA’s 2012
relevant control functions • encouraging a culture of open communication guidelines for conduct of electronic trading as well as the
• technical details of the coding protocols between different business units, while having Market Abuse Regulation of 2016. To ensure algos do not
used during the development process and a clear separation of roles and independent cause disorderly markets (and can be stopped quickly if
the overall system architecture reviews. Often this was achieved by having they do), RTS 6 and 7 stipulates appropriate systems and
• relevant market information, including a separate team that verifies and checks the controls to support safe interaction with trading venues,
regulatory and venue requirements output and quality of code as part of a formalised governance framework within
• a comprehensive list of all the risk controls • ensuring all these tests were recorded in which compliance managers and senior staff must have
(including kill functionality) which apply the development plan and included in the the understanding and operational ability to supervise
to each strategy or system, including information provided to the appropriate decision algorithmic trading operations effectively, including use
overall risk limits and those set within the makers for formal approval and sign-off of automated surveillance systems, pre- and post-trade
Aoraki Advisors
individual components/algorithms controls, and real-time monitoring. If all these checks and
monitoring activity fails, firms must have the ability to
POOR PRACTICE deploy ‘kill functionality’ and cancel unexecuted orders
POOR PRACTICE Firms who don’t consistently apply their in the event of market disorder. All these arrangements
Firms who don’t have clearly defined development and testing process across all are subject to annual self-assessment and publication of a Consultants in algo trading and
inventories in place and are only able to aspects of their business. For example, different validation report.
provide generic high-level descriptions for trading desks and/or business lines use different execution cost analysis
their algorithms, strategies and systems. methodologies. In addition, change management procedures must be
in place to fully document any material changes to how Offering independent advisory on using algorithms
Source: FCA - Algorithmic Trading Compliance in Wholesale Markets and ways to optimise electronic FX workflows
8 May 2018 For more information contact info@aorakiadvisors.com
May 2018 9
that fall under MiFID II’s broad the risks be truly mitigated and the has typically been done via replay
The Science of
Source: FCA - Algorithmic Trading Compliance in Wholesale Markets
REGULATORY ISSUES
BOOK OF THE MONTH
definition, with each category
requiring different levels of
very real threat of jail avoided,” says
Mo.
facilities. But this does not create
the dynamic trading environment,
SENIOR MANAGEMENT
documentation. “Defining and
classifying algos is a big piece of JWG’s Simpson says MiFID II’s
nor the stressed market conditions
(including latency fluctuations),
Senior management should be able to articulate Algorithmic Trading
work,” says Dan Simpson, head of
research at regulatory consultants
ongoing monitoring requirements
– effectively necessitating the
necessary to test how an algorithm
responds to extreme volatile trading
the standards set for development, testing and
on-going monitoring of their algorithmic trading
strategies.
and Portfolio
JWG. “Even though MiFID II’s initial
definition of an algo was refined,
establishment of a separate team to
track live algo performance within
conditions.
Management
it still encompasses a wide range the compliance team – could be The FCA cites as good practice the GOOD PRACTICE
of automated tools. Firms have to particularly onerous. “It’s not just use of dynamic testing environments With its emphasis on algorithmic trading processes
Firms where algorithmic trading is fully and current trading models, this book sits apart from
document every algorithm within a matter of cost. Firms are finding that examine not only how an algo understood by senior management, who play
scope and even explain why they it difficult to recruit staff with the behaves in existing market disorder others of its kind.
a key role in providing challenge across the
believe other tools are outside of necessary skills: you need intimate circumstances but also whether business.
scope.” knowledge of firm’s algorithms and it further contributes to market Robert Kissell discusses
experience of market conditions,” disorder, including in combination algorithmic trading across the
For example, where senior management various asset classes, provides
Governance framework – As the he says. with other market participants. are involved throughout the development
text of MiFID II and the FCA report Further, it specifies that “market key insights into ways to
and testing process and actively seek to develop, test, and build
attempt to emphasise, compliance There is potential for the structured conduct considerations need to understand the potential market conduct
is not a one-time push. Regulated governance framework around be a vital part of the algorithm trading algorithms. Readers
implications. learn how to evaluate
firms must ensure algorithms algo trading demanded by MiFID development process”, specifically
are developed and deployed in II to constrain innovation and noting that “development market impact models and
a safe and compliant manner on customisation. A precedent was set procedures which predominantly assess performance across
POOR PRACTICE algorithms, traders, and
an ongoing basis. One approach, in Hong Kong when the Securities focus on operational effectiveness” Firms where senior managers are not able to
advocated by GreySpark’s Mo, is and Futures Commission obliged are insufficient. The FCA states brokers, and acquire the
demonstrate the required knowledge to be knowledge to implement
to institute an ‘electronic trading users and providers to attest to their that it is poor practice for firms able to provide effective challenge to front
oversight council’ with a charter competence in automated trading. to be unable to demonstrate the electronic trading systems.
line algorithmic trading operations.
signed off by board members. This This quickly led to a more structured potential impact of their algorithmic
www.amazon.com/Science-Algorithmic-Trading-Portfolio-Management/
not only ensures standardisation of approach to customisation, with trading strategies on market dp/0124016898/ref=sr_1_fkmr0_1?s=books&ie=UTF8&qid=1524379757&sr=1-1-fk
approach to documentation, testing client-side tweaks reduced to levels integrity. “It’s no defence to say mr0&keywords=%E2%80%9CThe+Science+of+Algorithmic+Trading+and+Portfolio
and deployment across asset classes of urgency. Simpson suggests MiFID that you didn’t think your algo guidance within the next year or so, but I would not +Management%E2%80%9D
and geographies, but also supports II may further cramp customisation. could cause or contribute to market expect any fines just yet.”
senior level visibility and sign-off on “MiFID II requires that every algo disorder. Making sure it won’t is
new releases and material changes, has its own individual ID, with a a considerable undertaking,” says TOWARD TRANSPARENCY
as well as bedding in the cultural record of all material changes, TraderServe’s Idelson. Once the necessary policies, processes and controls
shifts needed to address market
conduct obligations and cement
including testing and deployments.
As such, firms may limit the The supply of such facilities is
have been put in place for the development,
testing and deployment of FX algorithms, The growth & future
new processes in the long term. frequency of tweaks as the process
will be burdensome,” he says.
extremely limited, meaning the
market as a whole has not got to
GreySpark’s Mo says sell-side firms should look to
aggregate, leverage and share the resultant data
and documentation between internal and internal
of Algorithmic Trading
“Firms should focus less on point- grips with this requirement. Many
BLOG OF THE MONTH
in-time MiFID II compliance than on Testing – Whilst MiFID II demands banks are backtesting algorithms stakeholders. A streamlined central repository The past few years have seen demand for Algorithmic
ensuring that behavioural change is thorough and separate algo testing, and setting up controls to keep for algorithmic trading may support real-time trading solutions increase. Some of the best
supported through implementation the requirement to conduct and them stable but reserving the monitoring of algorithm performance, including performing hedge funds attribute their success to
of appropriate principles, self-certify market disorder testing ability to deploy kill functionality risk management data, i.e. warning of proximity it. Devoid of human emotions, repelling latency,
procedures and policies, including is more challenging still. Testing if necessary. Because killing an to limits. It might also flag when an algo is due for technology-oriented and fast-paced, Algorithmic
on remuneration. Accountability functionality and conformance with order can be extremely disruptive, periodic testing, documenting its development and trading executes trading commands instantly and with
and disclosure must become intrinsic venues Mo advocates the development of testing history as part of the change management accuracy. Currently, trading is happening in the span of
to the BAU activities of the firm. mechanisms to intelligently control log required under MiFID II. microseconds and going on to Nanoseconds, with just
Only then can algorithms, detecting their closeness one millisecond accounting for millions in revenue per
to a breach to avoid having to take Such a facility might also help algo providers to year from market trades. Anonymity, Cost, and Speed
the ultimate sanction. “Before long, meet their obligations under the voluntary FX are few of the many desirable qualities of Algo trading
we’ll move to a new paradigm in Global Code of Conduct, which includes guidance besides ease of use, customization, etc.
which the algorithm will be coded on the supply of algorithmic trading services among
to include its own control engine, its principles of good practice. Specifically, the Code
using a standard library set that can calls for service providers to supply clients with
be applied across the whole suite,” sufficient data to understand FX algos and evaluate
he says. their appropriateness to the user’s execution
strategy.
JWG’s Simpson expects the FCA
to take a relatively pragmatic line “The global code has had wide adoption already
too, at least at first. “The FCA and we expect all major sell-side firms to have
document lays the groundwork for signed up by the summer. It sets a pretty high level
a future thematic review to provide for disclosure of information necessary for clients to
recommendations and clarifications evaluate algo performance, including on fees, and
Regulated firms must on its expectations. Depending on whether the provider is acting as agent or principal,”
ensure algorithms are developed and deployed how requirements are being met, explains James Sinclair, executive chairman of FX
This blog can be seen here: www.quantinsti.com/blog/growth-future-
in a safe and compliant manner on an ongoing basis. the FCA might provide further platform operator MarketFactory, and co-chair of the algorithmic-trading/
Code’s Examples Working Group.
10 May 2018 May 2018 11
our trading strategies become more
FXALGO INTERVIEW
APG is the largest pension delivery organization in important in 2018. Some of the
activities will get an official status
the Netherlands; its approximately 3,000 employees and we need to explain to our
provide executive consultancy, asset management, clients where and how we trade.
pension administration, pension communication and For FX forwards, swaps and NDF
this has become mandatory and
employer services. APG performs these services on although FX spot doesn’t fall under
behalf of (pension) funds and employers in the sectors MiFID II regulation, we apply the
same standards on our own FX spot
of education, government, construction, cleaning and trading.
window cleaning, housing associations, energy and utility
companies, sheltered employment organizations, and Were APG quite early adopters of
FX algorithmic trading and how
medical specialists. APG manages approximately €468 important is making use of the
billion (February 2018) in pension assets for the pension latest platforms and technology for
funds in these sectors. APG works for approximately your trading and dealing activities?
40,000 employers, providing the pension for one in At APG we have been using
five families in the Netherlands (about 4.5 million algorithms when executing cash
equity and listed derivatives for
participants).
over 15 years. We are very hands
on when executing our order
Ronald Lagarde has managed FX trading for APG Asset flow. We want to have control of
the order and execute it ourselves
Management since 2011. He has extensive experience electronically over our trading
in FX markets and is an expert in using and evaluating platforms. Here algorithms are an
single & multi bank trading platforms, ECN’s and important part in the toolkit of our
traders. APG was a relatively early
algorithmic trading. We asked for his views and opinion adopter of FX algos. In 2013 we did
on algorithmic FX trading. a research study into the use of FX
algorithms and after a few sample
trades we decided to enable them
for FX trading. We access the algos
Ronald, please tell us a little about desk’s DNA to continually search through our multi bank trading
your day to day responsibilities and for better ways to trade our clients platform and trade-fills flow real
tasks within APG? order flow. For a trader, that is time into our trading-management
what best execution is about. systems. While we continuously work
At APG we have a global trading With MiFID II coming into effect on improving our technology and
desk with traders in Amsterdam, the focus on transparency around platforms, for APG it is important to
New York and Hong Kong. The best execution has increased and use a matured platform and stable
guiding principle of the trading many of the activities that we do in technology, not necessarily the
desk is to implement exposure of measuring, evaluating and changing latest.
clients through the execution of
orders at the lowest cost and with
the least possible market impact.
We trade equity, fixed income,
money markets, commodities, FX
and derivatives on many assets.
Intelligent execution at APG For the past 7 years I have been
responsible for the FX trading and
execution for our pension fund
clients and our mutual funds. These
Speaking with an expert trader responsibilities range from hands-
on trading to advising clients on
their currency hedging mandates.
It is my job to develop, analyse and
choose trading methods, liquidity
providers and trading technology
that help APG and its clients to
Ronald Lagarde APG has a global multi-asset trading desk
achieve its goals. It is part of our
12 May 2018 May 2018 13
What types of FX algorithms Many large asset managers choose is set up, technically and legally, what the same time while still being able
FXALGO INTERVIEW
are your trading team currently to utilise bank-generated algos controls there are over order flow, to slice large trades into smaller
employing and what factors as they believe it gives them the how the Chinese walls work. This due executions with smaller bid/offers and
generally influence this? best access to the different trading diligence is important for our control lower overall impact. This is important
venues that exist. What about APG. over the order execution. to APG as we have a global multi-
We distinguish 3 types of How do you source yours? asset trading desk where all traders
algorithms with different urgency How involved do you get in the trade multiple asset classes, often at
levels. Aggressive (high urgency), At APG we have strong relationships testing and fine-tuning of the FX the same time. In order to do this in
neutral and passive (low urgency) with many top tier banks that give us algos you are using? an effective and cost efficient way,
algorithms. Which type of algo access to their liquidity and balance trading technology is vital.
you use depends on the trade-off sheets. For FX trades we access this APG likes to be involved early when
you make between impact and liquidity through two multi-bank new algorithms are being developed Rigorous TCA is important to
opportunity cost. Most of the time, dealing platforms, where we can and we also continuously give our ensure that algorithmic execution
when we execute trades at APG, we do RFQ, RFS and use algorithms. feedback towards the algo providers strategies genuinely achieve a
aim for the lowest impact possible. Next to this we connect ourselves on what we find important in better result than more traditional
During a trade we will manage our to two ECNs directly and trade algorithms. With the initial testing trading methods. How do you tackle
opportunity cost in a controlled via a prime broker. We are not we do not want to be involved as this and what sort of benchmarks
way. This decision is taken because planning to expand to more ECN’s. this is more for the developers, are useful?
of our trading size which is This can be done better, more cost however when an algorithm is ready “We see the correct
generally larger than average. Our effectively and with lower latencies for live usage we do not hesitate At APG we believe doing TCA is very connectivity, quality of the
experience is that on large trades, by technology providers and our to use new algos. Initial feedback is important to analyse the different smart order routing and policing
if you trade over a longer period banks. We utilise bank-generated given directly to the provider and ways of trading and accessing market of the liquidity providers as the
and trade smaller clips, on average algos mainly for the technology they longer term TCA results are shared liquidity. Furthermore we think main differentiators in choosing
the total trading cost will be lower. offer for structuring order flow and upon request if the sample size is that systematic and independent one algo over another.”
Therefore at APG we often use for connectivity to ECNs with smart adequate. In the end we would TCA is needed for it to be useful.
passive and neutral algorithms. It order routing capabilities. We see like to work together with our algo We have been using an external
is the skill of the trader to analyse the correct connectivity, quality of providers to develop algos most independent TCA provider since performing in real time. The management approach when
the markets, price action or other the smart order routing and policing suited for our FX flow. 2014. Our TCA partner provides the degree of real time analytics and using FX algorithms. Very tight
factors and to decide when to of the liquidity providers as the market data and together with APG performance indicators that are limits were used and settings
deviate from this default execution main differentiators in choosing Are you using FX algos for every develops benchmarks that we find available to FX in an integrated were changed frequently during
strategy. When there is a real high one algo over another. Next to this trade or only for specific situations, useful in analysing our trades. For and centralized way is very limited. the execution time of an algo.
urgency of a trade we have the access the ability from a provider for example executing a larger evaluating algorithmic trading we This is mainly due to the fact that The hybrid human approach best
option to use more aggressive to tap into internal liquidity can be block trade or dealing with more focus mainly on spread capture and the use of execution management characterized our usage of FX
algorithms or trade on our multi a differentiator. In that sense, we illiquid currencies? information shortfall. We bucket systems (EMS) is not that common algos at first. Advantages were
bank trading platforms/ECNs. investigate how a bank’s desk E-desk comparable algorithmic executions in FX. At APG we do not have an that trader skills were used and
APG mainly uses algorithmic across different variables and check if EMS for FX yet, unlike our equity we could micro and risk manage
execution when executing large an algo is doing what it is supposed trading where the use of a EMS the algorithms. Disadvantages are
orders. For smaller orders the added to be doing, compare the algos has been integrated in the trading that you overrule the algorithms
value is small and its often quicker versus each other and versus different process already for a decade. We frequently and therefore influence
and/or cheaper to use a multi-bank trading methods. This exercise if envisage that in the future we will the measurability and performance
trading tool. For large orders we find very difficult for many reasons, for integrate an EMS in the centre of of the algorithms. In our case it
it important to use passive algorithms example market data is still not our FX trading process and from made some of the TCA results on
that give us access to liquidity in the freely available, volume data is not this central point we will access the algorithmic trading less useful, while
market. Our main goal is to minimize available and for TCA to be useful whole FX market, be it through TCA is very important to show that
the impact of our trading activity. a large sample size is needed. After ECNs, crossing networks, RFQ, RFS algos add value and to decide which
Algorithmic trading fulfils a role in doing TCA on our trade activity for or through broker algorithms. Some algos have the best performance and
achieving this. the past 4 years we are at the point algo providers do offer real time are suited with your trading goals.
where we can genuinely use TCA to analytics for their algos. Although Therefore in 2017 we made some
What are the key benefits that you make decisions in the trade process. we find this a nice initiative, the changes in the way we use algos,
getting from algorithmic trading? added value for us is limited as mainly that we use fewer and less
Post-trade TCA has great value we need it centralized over all our tight limits and we always let an
Important benefits we get from of course but how important is trading activity. algo finish. This had a positive effect
algorithmic trading are getting the ability for you to see how an on the quality and fairness of our
access to a large diversity of ECN’s algorithm is performing in real-time There seem to be two schools of TCA results.
and liquidity providers, accessing and to be able to intervene if the thought as to whether to let algos
the internal liquidity of our brokers deviation to a benchmark in terms do their job or to go for a more The correlation between the cost of
and their franchises and using the of slippage has crossed a threshold hybrid, human-algo approach. one particular algo and the direct
“We bucket comparable algorithmic executions across different variables and smart order routing and placement that is too great? What’s your opinion on that? benefits it delivers is not always
check if an algo is doing what it is supposed to be doing, compare the algos versus technologies that they develop. Next consistent. How big a challenge is
each other and versus different trading methods.” to this algorithmic trading also allows For a trader it is very important In the beginning we had a that in determining which ones
a trader to focus on more trades at to see how his or her trades are very trader dependant micro- to use?
14 May 2018 May 2018 15
It’s a challenge also because of the fee structure. Until This initiative originates from the equity world and we
FXALGO INTERVIEW
PROVIDER VIEWPOINT
2017 we paid the same fee for all our algos. In 2018 we
are moving to a two tier fee model on FX algorithms
were we pay more for the sophisticated ones that add
are enthusiastic to participate in this project.
What steps do you think banks and algo providers can
FX Algo trading - implementing
the most value and we pay less for the more standard
algorithms. Based on the workings of the algorithm,
take to increase the appeal of algorithmic execution
and remove some of the mystery associated with it?
solutions right through the workflow
the depth and performance of the smart order routing
and our own TCA results, we decide in which tier every The biggest step for us would be that providers enhance By Alfred Schorno, Global Head of Sales and Managing Director, 360T Group
algorithm falls. With this new model we want to reward venue analysis and show it to clients. Algo providers can
banks that have employed algos that add the most value give better insight in the venues and liquidity providers
for us and encourage more development in algorithms that they route to and show us performance data on the increased use of Algos as part of of sophistication here continues
that suit us the best. these venues. Currently not all algo providers are passing an execution strategy. Institutions to develop from specialist firms
on this level of detailed data. Also the workings of the are recognizing the limitations of focused on only this to more
leaving large orders with the voice low-cost platform and provider
As algorithms continued to be developed and deployed order placement logic and smart order routing rules can
desks of their liquidity providers solutions.
in the FX space, they are starting to appear very similar, be explained better. We find the policing and selection
and the importance of measuring
almost like a commodity. How do you tease out and of the venues very important, but we don’t see how this performance at all stages of WHY PICK-UP HAS BEEN SLOW
select the ones that are most suitable for your own exactly works and have little influence in this process. the trade cycle. Changes to the Relative to Equities, why are Algos
requirements? We would like to be more involved in choosing the structure of the market have meant so slow in becoming part of the FX
right venues that suit our orderflow. Our equity desk reduced market maker inventories traders execution arsenal? Some
Some algorithms indeed appear very similar to the has performed a due diligence qualitative study on all and an increased presence of of the challenges that the buy-
extent that we cannot tell the difference. One of its algo providers. Through 20+ questions they gained short-term players forcing larger side faces in FX include accurately
our technology providers has recently invited us to insight in the inner workings of the algos per provider consumers of FX liquidity to re- booked allocations for underlying
participate in early testing of an FX algo wheel. This is ranging from smart order routing, machine learning to think their approach; Algos will be accounts, broker list limitations,
functionality where a program will select from a list of how the algo accesses the systemic internaliser. They use an increasingly used weapon in this credit risk concentration and the
battle. ability to trade orders to a specific
similar algos with similar parameters a random algo that this qualitative study next to their TCA to choose which
tenor rather than just spot. In a
will trade the current ticket. Through the use of this algos to use. For FX we want to roll this out in 2018.
In simple terms, Algos offer non-cleared world all of these
wheel you will build a good database of comparable slow/fast and passive/aggressive need to be taken into account, a
trades that in time will assist in choosing the best algo(s). Do you see any risks in using algos or conflicts of Regulatory change has further execution methodology. The core difference from other asset
interest that might arise between provider and user? accelerated the need for institutions most used are time-weighted classes. Considerable thought
to take control of their FX execution average price (TWAP) or volume- needs to go into implementing an
We see one main risk that exists in the use of FX process and show transparency weighted average price (VWAP) effective solution right through the
algorithms between the provider and the user, being throughout the lifecycle of an order. strategies. Leading providers workflow, not just the execution.
the potential misuse of information that the user gives The trend we are observing requires tune their offerings according to We spend a lot of time helping our
the building of a process-driven the requester profile and market clients make sure the lifecycle of an
through using the algo. FX algorithms are sold as an
execution policy, automation of low- conditions. Active monitoring, order is not broken to achieve this
agency solution in a market that has been characterized
value orders and the ability for a access to liquidity across multiple desired outcome.
until recently by a principal trading model. Providers user to have full platform oversight, venues and the addition of unique
offer algorithmic trading technology with connectivity from inception to delivery. franchise access help reduce market A longer-term solution to the
and smart order routing for a fee. When the providers impact and increases probability difficulties caused by bilateral
do only this, the agency offering works and the FX An important element of this is the of fill. All of this is for nothing credit may be on the horizon. In
market can use this model next to principal trading. The focus on electronic execution and without accurate TCA and the depth Europe the clearing of FX products
providers being mainly banks should take all efforts to by central counterparties is slowly
prevent any misuse of information of flow that is being becoming a realistic option to help
handled by the agency algo desks, with segregation of address some of these workflow
duties and Chinese walls. Providers also offer this agency problems that the buy-side faces,
solution with access to the banks principal liquidity. not just when executing Algos.
Potentially this can be a conflict of interest if managed
CONCLUSION
the wrong way.
As the buy-side faces a heavier
burden to ensure execution is at
Are you likely to expand your use of algos? a high quality, driven by client-
demand, regulatory and FX Global
APG currently uses FX algorithms for 40-60% of its Code of Conduct requirements there
FX flow and we have no plans to increase this in the is no question that algorithmic
short term. The development and performance of our execution in FX is going to play a
current and potential new algorithms will determine part. The goal for 360T as a platform
if we will use it more or less. If we compare the use of provider and the sell-side as algo
FX algorithms versus other assets classes we trade like builders is to continually enhance
equity and futures markets, there is definitely room for functionality and services to help
meet these demands from both a
more algorithmic trading in FX. That said, in markets
workflow and structural standpoint
like fixed income and interest rate derivatives, there is
– a goal we are actively working
the most scope for increased electronic and algorithmic Institutions are recognizing the limitations of leaving large orders to meet.
APG works for approximately 40,000 employers trading. with the voice desks of their liquidity providers
16 May 2018 May 2018 17
A peek at algorithmic
interface and experience across all feature a real-time and interactive
PLATFORM PROFILE
providers and algos. Depending on user interface, and will tie into the
their specific trading requirements, FXall trading workflow to empower
trading on the FXall
algo users on FXall can choose from traders to make better informed
a wide range of strategies, from decisions on a pre-trade basis.
passive algos that maintain a desired
platform execution rate over time while
seeking to capture spreads, to more
aggressive strategies that seek to
Transaction Cost Analysis has been
described as more art than science.
Would you agree with that and what
capture as much liquidity as possible. do you see as the next step in its
Jill Sigelbaum, Head of FXall, Thomson Reuters, shares some In addition, clients benefit from evolution with respect to FX trading?
insights with FXAlgoNews. a growing suite of analytical and
reporting tools that help measure Given the over-the-counter nature
the quality of their execution, of the FX market and the difficulty
they have access to Settlement of forming a representative view of
Jill, please can you please remind us experiment with these advanced the overall market for comparison
Center, our automated post-trade
of the type and range of clients that execution strategies in order to purposes, I appreciate how TCA can
processing platform, and they
now utilize the award winning FXall enhance their trade execution be seen as more art than science.
also enjoy the automatic straight
multi-dealer trading platform? and minimize spread costs. We are There are indeed certain challenges
through processing of their algo
witnessing strong growth across to assessing the performance
FXall is the leading independent trades from and into their order or
all client segments on the buy- of your FX trade execution and
platform for institutional foreign treasury management systems.
side, especially by asset managers the costs associated with it, both
exchange trading and workflow and hedge funds, as well as by the
What solutions does FXall offer to implicit and explicit costs.
solutions. Used by over 2,300 larger corporate traders. We expect
institutions worldwide, including help clients achieve and demonstrate
continued adoption of algos by buy- As an example, the industry is
asset managers, banks, broker- best execution for their FX
side traders as they seek to ensure experiencing certain growing pains
dealers, corporations and hedge transactions?
the efficient execution of orders at with time stamps. Accurate time
funds, FXall offers deep liquidity the best price - partly in response to Our proprietary suite of analytical stamps are necessary to assess
from over 180 leading liquidity new best execution requirements and reporting tools allows users potential execution slippage across
providers. - and as they leverage automation to assess the effectiveness of the life-cycle of the trade, from the
to increase operational efficiency of their trade execution, take steps time of origination by the portfolio
What choice of trade execution the trading desk. towards reducing transaction manager, to the time the trading
capabilities does FXall provide to help
costs, and meet best execution desk submits the order into the
meet the wide range of client needs? What functionality do you offer reporting requirements. For many market and it gets filled, potentially
to traders using bank-provided years now FXall has helped clients over a period of time if it’s an algo
One of the core differentiators
algorithmic execution strategies on understand whether they are trade. This is causing participants
of the FXall platform is its unique
the FXall platform? getting a fair price, quantify the to reevaluate their voice and
combination of order management, Jill Sigelbaum
trade execution, and post-trade spreads they pay over time, assess electronic trading workflows, as
Thomson Reuters has done
capabilities. Participants on provider performance, as well as well as their end-to-end order
significant connectivity work to
FXall benefit from an advanced gauge market conditions. We are management and execution been the growing pressure from to meet all of their FX execution
consolidate access to sophisticated
execution blotter with powerful now in the process of rolling out systems, in order to ensure these regulators and asset owners, requirements and to transact
algos provided by the leading
order management features such as our improved platform for trade time stamps are accurately captured pressuring the buy-side to achieve with the liquidity providers of
liquidity providers, thereby offering
trade netting and allocations, and analytics and reporting, which will and stored. Looking ahead, as and demonstrate best execution. their choice. The ability to select
FXall participants a common user
complementary price discovery and regulation and technology drive Algos are one tool that traders the most appropriate execution
trading protocols to trade FX spot, increased transparency into the FX can use to achieve best execution. method for a given trade while
forwards, swaps, NDFs and options. market, and as familiarity with TCA In addition, algos also offer the maintaining a comprehensive end-
They can access deep liquidity continues to grow, I expect we will unique benefit of automating to-end workflow is a key benefit
and secure the best price across see more consistent approaches certain trading activities, freeing up of the FXall platform. For certain
multiple providers by using a range and standardization in terms of the trading desk to focus on their trades, that could be an RFQ. For
of execution methods, including how institutions demonstrate best more challenging trades. As market others trades, that could be an
request-for-quote (RFQ), streaming execution for their FX transactions. participants continue to face cost algo. Independent platform and
prices, an anonymous order book, pressures, I believe the potential technology providers like FXall are
as well as resting, fixing, and algo In your opinion are the traditional to increase operational efficiency key to providing a level-playing
orders. reasons for using FX algorithms through automation will also be a field through which to assess FX
(reduced market impact, access key driver of algo adoption. trading performance, applying
Has algorithmic FX trading been to deeper liquidity, increased a consistent methodology to all
increasing on your platform recently trader productivity etc.) likely to A key mission for FXall has always liquidity providers, and enabling
and if so, amongst which clients in be overtaken by other drivers and been to be the provider-neutral the consumers of this liquidity to
particular and what factors are likely considerations in the future? platform of choice. What role can compare the quality of their trade
to be driving that? leading platform providers and trading execution across counterparties on a
These traditional reasons certainly venues like yourselves play in helping comparable basis. As mentioned, our
Algorithmic trading on FXall continue to be key motivators to shape industry best practice when it proprietary trade analytics empower
continues to grow at a significant driving the use of algos, especially comes to algorithmic FX? FX traders to make better informed
pace, more than doubling over given the current fragmentation of decisions, enhancing their execution
2017, as the early adopters FX liquidity across counterparties As a provider-neutral platform, we planning and counterparty selection,
incorporate algos into their daily and trading venues. Another strive to provide the optimal suite across all execution methods,
trading. Participants increasingly key driver of algo adoption has of solutions that allow our clients including algo trading.
18 May 2018 May 2018 19You can also read
