FastMatch taps Pragma Trading for buy side algo

13 Pages·2015·4.46 MB·English

ISSUE 5 | MARCH 2015 WWW.FXALGONEWS.COM FOLLOW US AT:
EBS to use algos to link
liquidity pools
S
E As it prepares to launch a brand new liquidity pools,”
I
R integrated trading platform later this explains Jeff Ward,
O
T year that will act as a single portal to global head of EBS
S its multiple FX execution channels, Direct.
P
ICAP’s EBS plans to use algorithms to
O
T link up those liquidity pools. EBS unveiled plans
to launch its new
“We believe we can link multiple platform in early
pools of liquidity and execution February. Having
options through intelligent diversified its
New EBS UI
algorithms in a way that has not been business in recent
done before. So if a firm is looking to years beyond the traditional central relationship-based platform; and
sell a particular currency while also limit order book, it will now offer EBS Select, the segmented liquidity
leaving an offer to rest in the market, integrated access to three portals: pool in which customers can trade
it could use algorithms to place EBS Market, its flagship anonymous on a bilateral but anonymous basis
those trades in the most appropriate platform; EBS Direct, the newer through a prime broker.
FastMatch taps Pragma FastMatch, which is part-owned by
online FX broker FXCM and based
Trading for buy side algo on the Credit Suisse Crossfinder
matching engine, first launched in
mid-2012.
FX electronic communication trade portions in different liquidity
network FastMatch has deployed pools, explains Dmitri Galinov, chief
IN THIS ISSUE
a customised algorithm developed executive of FastMatch.
by Pragma Trading at the heart of
AgencyFX, its new buy-side liquidity “The algo allows clients to take a PAGE 6
pool unveiled in late January. large proportion of the order and n COUNTRY SPOTLIGHT
cross it at the mid-point, while Australia starts to embrace FX algos -
AgencyFX aims to augment the simultaneously taking a smaller part Fair dinkum!
----------------------------------------------------------------
need for market makers with a of the order and participating in the
PAGE 10
continuous mid-point matching broader FastMatch market. We don’t
n INDUSTRY VIEWS
engine through which buy-side firms believe there is anything like this
Capturing new opportunities in futures
can trade directly with one another. available elsewhere,” says Galinov.
markets with FX algorithms
The Pragma algorithm allows
----------------------------------------------------------------
users to split up their orders and AgencyFX also offers an auction PAGE 14
service, known as SafeMatch, which n BUYSIDE PERSPECTIVES
delivers an executable rate at 4pm Adam Cox catches up with the Zurich-based
London time as an alternative to the fund manager Philippe Bonnefoy
WM/Reuters fixing rate. ----------------------------------------------------------------
PAGE 18
“The rate is determined from the
n EXPERT OPINION
midpoint of trades on FastMatch
Save your FX Data
during a five-minute window before
----------------------------------------------------------------
and after 4pm and is completely
PAGE 20
transparent; we plan to start n DEVELOPERS CORNER
publishing it on our website in The Certified Algorithmic Trader®
Dmitri Galinov April,” says Galinov. (CAT®) program
WHERE Algos could provide a solution to WM changes T
O
P
S
T
Intelligent use of algorithms could be used to tackle some “Only under very special circumstances will a O
of the challenges market participants have encountered as weighted arithmetic average equal the median for R
PRIVACY I
a result of recent changes to the calculation methodology a specific data sample, which in this context means E
S
behind the WM/Reuters fix, a study by TD Securities has there will always exist some amount of slippage or
found. tracking error between an algo trying to replicate
the WM fix and the official WM fixing price. We
MEETS “Technically, the WM fix cannot be perfectly replicated have done quite a bit of analysis to determine how
by any type of trading strategy. This is because a trading far a trading strategy, such as the common TWAP,
strategy will produce a weighted average effective price, can practically and theoretically deviate from the
whereas the WM fix is based, in part, on a statistical WM Fix,” Aston explains.
median price,” says Paul Aston, head of quantitative and
LIQUIDITY
algorithmic solutions at TD Securities. The long-awaited changes to the fix methodology
were implemented on February 15, following
recommendations from regulators and consultation
with the industry last year. Under the new
framework, the calculation window has been
GET CONNECTED TO FX TRADING widened from one minute to five minutes – in the
case of the popular 4pm fix, the window now runs
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> from 15:57:30 to 16:02:30.

Bloomberg Tradebook connects you—with full anonymity—to some of
“Statistically the new five-minute window
the deepest and highest quality liquidity in FX trading. Sophisticated
introduces more exposure to price drift and
algorithms and innovative order types let you implement complex
volatility over the fixing window than under
strategies accurately and quickly. Connect seamlessly with our
the old methodology. Hence, it will be more
Bloomberg Professional® service platform to streamline your
challenging for banks to cover their risk when
workfl ow and back-offi ce solutions.
promising clients the WM rate and it will require
buy-side firms to become more sophisticated in the
Visit TBHF <GO> or bloombergtradebook.com/fx
ways they seek liquidity around the fix. Algos could
to request a demo.
certainly play a big role in this space, but their
effectiveness will depend on how well one can
devise strategies to minimise slippage from the WM
mid-price,” says Aston.
Trading Technologies to offer
access to QB algos
Trading Technologies (TT), which every TT user,” says Rick Lane, chief
delivers trading systems to a wide executive of Trading Technologies.
range of financial institutions, is to
provide access to the fixed income Trading Technologies’ X_TRADER
and futures execution algorithms platform gives users connectivity
developed by Quantitative Brokers to major fixed income trading
(QB). venues such as ICAP’s BrokerTec and
Nasdaq’s eSpeed. Its new platform
“Our customers are excited will offer the same functionality,
about the ability to gain access in addition to a link to KCG Fixed
to Quantitative Brokers’ suite Income. The addition of QB’s algos,
of industry-leading execution which is currently in beta testing, is Rick Lane
algorithms through the TT platform, scheduled to roll out to clients later
and we’re excited to launch our new this year, and TT also plans to add of electronic trading. In a world in
algo framework and welcome QB support for other broker algos. which performance is measured in
as our first partner. By integrating basis points, this alliance delivers
with third-party algo providers “The collaboration of these two significant competitive advantages,”
like QB, we can extend the range industry leaders brings clients says Christian Hauff, chief executive
©2013 Bloomberg L.P. All rights reserved. 51275700 0213 This communication is directed only to market professionals who are eligible to be
customers of the relevant Bloomberg Tradebook entity. Please visit http://www.bloombergtradebook.com/pdfs/disclaimer.pdf for more information of execution choices available to unparalleled access to the future of Quantitative Brokers.
and a list of Tradebook affiliates involved with Bloomberg Tradebook products in applicable jurisdictions. Nothing in this document constitutes an
offer or a solicitation of an offer to buy or sell a security or financial instrument or investment advice or recommendation of a security or financial
instrument. Bloomberg Tradebook believes the information herein was obtained from reliable sources but does not guarantee its accuracy.
March 2015 3
S ANZ gets ready to the price-for-risk
E
I mentality.
R
O enter FX algo arena
T “We want to have
S
P the flexibility
O Australia’s ANZ, one of the country’s top banks, has as the market
T
been developing a foreign exchange algo service that it progresses to be
expects to unveil later this year. Provision of FX algos has aligned to those
historically been the province of the large global banks customer bases
and the move represents a first for Australia’s banking and maintain our
scene. “We listen to our clients in terms of what we relevance with
build and what they’re using elsewhere,” Luke Marriott, them,” he said. Luke Marriott
global head of wholesale FX at ANZ, told FXAlgoNews.
Marriott said ANZ traditionally has been a liquidity
Marriott said the group has been developing an producer through its own inventory held within its
algorithmic execution service in house that will be e-engine. The group has been increasingly moving
released later this year. “We’ve been working on it towards electronic trade since launching its Progress
for the past eight months and we’re just in the final Apama platform in 2010 to automate currency flows.
stages of refining that on how we deliver that to our
customers.” While ANZ is the third largest of Australia’s “Big Four”
banks in terms of overall assets, it has a strong franchise
Marriott added that there has been a natural in its FX business. In an Asiamoney foreign exchange
progression, not only through the market evolution survey for 2014, ANZ was ranked the top FX service
and the resulting peaks and troughs of volatility but provider as voted for by financial institutions. It was
also in more recent times in terms of regulatory change, also the highest-ranking Australian bank as voted for
which is bringing more transparency to the market by corporates, coming in fourth behind Citi, HSBC and
around transactional costs for service. He said there Deutsche Bank. Marriott did not provide more detail on
was a willingness among regulators to see more of a the precise timing of the launch or the specifics of the
transparent fee-for-service approach as opposed to algo service the group will offer.
SNB fallout driving
increased algo uptake
The dramatic impact of the Swiss National Bank’s sudden
removal of its floor on EUR/CHF in January is driving
increased use of algorithmic execution tools among
FPGAs - HELPING TO
corporates and systematic hedge funds, according to BNP
Paribas.
ACCELERATE FX

“In the wake of January 15, many non-bank market
makers pulled their liquidity and spreads have widened
significantly in G-10 currencies. For some clients that hadn’t
historically considered algos because their risk transfer
pricing was already competitive, this new dynamic has
prompted a rethink,” says Asif Razaq, global head of
FX algo execution at BNP Paribas. Using algos enables
corporates to cut their execution costs, with a stronger
chance of trading inside the bid-offer spread quoted by
banks, while for hedge funds that previously used their
© 2014 NanoSpeed own algorithms, using bank algos now gives them access
to deeper liquidity from across the market, Razaq adds.
Gain a competitive edge with your algorithmic
“Our algo execution volumes rose by 33% in February and
trading, market data processing and risk
a further 50% in the first half of March. There is a large
management activities.
swathe of virgin users that previously found it hard to
justify using algos, but the combination of the SNB volatility
and the changes to the WM/Reuters fix on February 15 has
created a drive to improve execution,” he says.
For more information contact
[email protected]
T to algos to tap into liquidity, which overnight, bankers said. “I think it
H
G they think is more efficient.” will be a slower process,” Marriott
I said, noting there had been some
L
T The ANZ executive added that that natural progression in recent times.
O
P trend was underpinned by the view
S that the cost from a price-to-risk One problem, he said, stems from
Y approach was greater than that what happened on the 15th of
R
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the country’s “Big Four”. But ANZ
In this edition of FXAlgoNews, we travel “down under” and discover that FX algos are beginning and Westpac have strong foreign “We’re seeing some traditional “I think what you find is that as
exchange businesses. guys come back to old methods of algos become more popular in
to catch on. Adam Cox investigates.
execution through voice in more
Asia, you’ll see local banks trying
While the big global banks may recent times.”
to play catch up,”
Australia has long been one of at least with more sophisticated Execution at BNP Paribas in London. have more to spend on R&D and
those countries that punch above hedge funds and with some money That means more connectivity to infrastructure, Australian banks Marriott argued the take-up would
their weight. A population shy of managers. Corporates are thought liquidity sources. appear to recognise the importance be stronger were it not for the way SNB move. “Throughout the history
24 million people, it ranks only to be slowest to start using algos, of that investment. A report by the market became dysfunctional of currency trading globally, you’ve
51st in the world demographically. with the possible exception of some Razaq said an argument that some KPMG on the main Australian banks’ from the SNB-induced mayhem, never seen a mature G10 currency
Yet it was 12th last year in terms very larges multinationals. local banks may make is that some performance in 2014 underlined the during which some people declined move 40% on a risk event. If you look
of nominal GDP, coming in at just algos don’t work so well in low- growing attention being paid to or did not honour rates. But what at the normalised volatility over crisis
below $1.5 trillion, and the country “I think the progression of ‘e’ into liquidity environments and that a investment in technology. about the argument that algos events you might see a 10-20% odd
boasts the world’s 5th most traded foreign exchange is an evolutionary human trader is required to achieve would be helpful in just such a crisis movement in a mature currency and
currency. piece. There probably have been best execution. But he expects that “There is a clear shift in control, because they can instantly scan a we’ve probably seen some greater
some revolutionary step changes. As this view will start to change once from organisations to customers, wide range of liquidity sources? moves in emerging currencies. But
Volumes in the Australian dollar the market became fragmented for local clients start showing more that is occurring,” the KPMG you certainly wouldn’t have expected
are not far behind those of sterling the liquidity providers, people have demand and banks in Asia begin to report said. New technology is “Liquidity is a function of the a 40% move and that’s what we saw
and they surpass those of both the developed their own aggregators to offer their own solutions to combat being embraced and clients are capacity of the market to risk- on that day.”
“safe haven” Swiss franc and the bring that liquidity back together,” loss of market share. “I think what increasingly less loyal to their absorb and take in those shocks,”
Canadian dollar, whose country said Luke Marriott, global head of you find is that as algos become more institutions, it added. The report Marriott said. “And I think where the Marriott said he planned to raise
is a Group of Seven member. In wholesale FX at ANZ. popular in Asia, you’ll see local banks identified a number of areas e-engines are tuned to try to match the question of the market’s ability
fact, among pairs, USD/AUD pair trying to play catch up,” Razaq said. in fintech spending, including buyers with sellers with an exchange- to absorb risk with the forex
is fourth-most traded, just behind Once market participants have a development of tools and platforms trade mentality and a lot of the committee in Australia and with the
cable. consolidated view of liquidity, the In that sense, the move by ANZ for buying and selling foreign capacity to risk-absorb has been global committee. Regulatory moves
next step is to look at how best to represents an important step in the exchange as well as algorithmic removed from the market, when you such as OTC reforms and the Volcker
Given this clear interest in trading take advantage of it, particularly process of algo adoption in Australia development for risk management. do get a critical event, regardless of Rule on proprietary trading have
the Aussie and the role played as spreads have compressed and and the bank believes its customer the speed of execution of the tool, if pushed banks in this direction.
by Sydney (and Wellington) in volatility has until recently been low. base is ready for a new phase thanks SLOW GOING a market can’t risk absorb, liquidity “And where pricing’s gone out to
terms of kicking off the global “That’s what’s led to the evolution to the way market conditions have The adoption of algos in Australia becomes dysfunctional.” the fifth decimal place now, with
24-hour trading day, one might of algo trading,” he said. evolved. will gain ground but it will not be That, he said, was a function of the yields so low, the capacity for the
think Australia would feature a error of risk becomes far less, so then
G
fairly well-developed algorithmic Marriott is in a somewhat unique “I think the peaks and troughs of M the tolerance for absorption of risk
P
trading scene for FX. Indeed, it position in that he’s in the process of volatility see trends shift in the way e: K becomes far less as well,” he said.
c
is a market centre that has been developing ANZ’s own algo service our clients execute their business,” ur
o
comfortable embracing algos for (see related news article). Other Marriott said. “In a high volatility S This was true whether a firm was
equities trading, where usage is Australian banks have not yet built environment, liquidity providers a market maker or a proprietary
commonplace and highly advanced. their own, leaving the field open to generally underprice their access book. “I would suggest they’ve
Yet to date, the local currency large global banks that have been to liquidity and in low volatility taken structural liquidity out of the
market has been dominated by offering algos to their clients for environments, they probably market,” Marriott said, referring to
voice trading or non-algorithmic some time now. overprice that liquidity. So in a low the regulatory community.
electronic trade. volatility environment, it seems
“Global banks have more R&D, more that more sophisticated multi- “In the past, there was an obligation
ALL CHANGE AHEAD bodies on the ground and more nationals and investor-based clients for the banks to be a conduit for
Market participants expect FX investment in infrastructure,” notes are assuming that risk themselves financial liquidity and create pools of
algos to gradually find favour, Asif Razaq, global head of FX Algo and utilising direct market access liquidity in their core competencies.
6 March 2015 March 2015 7
T market access it could push some at TradingScreen, said a focus on a lot of them are now setting up their own dealing Those models, he added, tended to focus on average
H
G trades into the European time zone. transaction cost analysis and a rooms bringing their execution back onshore. Again price execution, with a focus on slicing orders and
I “Clients who are executing in Asia trend away from outsourcing are this is being driven by Best Execution and these guys are disguising their activity across a period of time.
L
T are finding that the time zone both factors that are likely to fuel unencumbered by legacy systems and practices,” Dweck
O
P can be very illiquid, so they delay demand for Algos in Australia. said. The historical tendency for Australians to rely on voice
S execution until the European time trading and relationships has meant that the demand
Y zone in order to minimise slippage,” “It’s definitely true that we are The TradingScreen executive said this trend has been TradingScreen gets for Algos has typically come from large
R
T he said. “Having said that, there are seeing a significantly increased under discussion for some time. “It is still early days now, global institutions that trade around the world who “get
N
clients who are forced to trade FX interest in TradingScreen’s TCA but I think that we’ll see more take-up of Algos as more it”, whereas local institutions had shown less interest.
U
(in local hours) on the back of their product,” Dweck said. super funds start trading for themselves.”
O
C equity trading activity.” “It’s like a lot of things: look out on the horizon, there’s a
At the same time, a number of funds Marriott said ANZ’s smaller corporate base hasn’t shown tsunami coming. You can see the wall. You can see it does
In addition, there will always be in Australia have been looking to set demand, but multi-nationals and investors, both on a make sense and it is going to hit and people will have
those who want to minimise market up their own dealing desks. local and a global scale, are looking for direct market to embrace it. I don’t see that any domestic market can
Alan Dweck
risk and don’t want to wait until access and the use of algos. withstand these sorts of tides. They make a lot of sense;
“It is still early days now, but I Europe opens up. “Those guys most certainly are technology has shone a light on FX trading practices.
think that we’ll see more take- talking to TradingScreen about Perhaps predictably, the strongest demand is coming from Issues of best execution and TCA have been brought to
In fact, while the latest BIS tri- using FX Algos going forward. Now the more sophisticated players. “They run specialist teams the forefront by the increased transparency. Around
up of Algos as more super funds
annual FX survey is a couple years a lot of them aren’t really up and to manage that risk and they’re always looking for tools the world people are turning to the more sophisticated
start trading for themselves.”
out of date, it did show that running yet. But things are starting to effectively manage that on their behalf,” he said. platforms to provide them with Algos and tools to achieve
Australia’s share of the global to happen, it is starting to grow,” he best execution,” Dweck said. “That sort of pressure’s not
If that gets removed and the market market had actually shrunk, with said. “Their need to establish Best Demand appeared to be coming from a combination going away.”
moves to an exchange-based model trading activity falling by 5%. Execution drives them towards using of hedge funds and institutional money. “The real asset
predicated on the equities markets new tools as they realise that they managers not so much but they will look to use that The question for both the Sell side and the Buy side in
where buyers match up against “I think if you look at the statistical can’t simply hand over responsibility (algos) for their fixing risks I would say in the future. But Australia is when that tsunami will make landfall. That’s
sellers, there will inevitably be a analysis over FX markets, volumes to their bank or custodian. Many of the hedge funds, there’s no doubt that the execution harder to say with certainty.
natural imbalance in capital flows. in the Asia time zone have dropped them are now talking to us because desks have been looking to those tools for the best
With the banks having had their off while they have picked up in the they want to take control of their FX depth of liquidity and least market impact in execution. “I think Aussies are very good at doing things when
wings clipped, it begs the question of European and New York time zones execution. We offer a sophisticated And we are seeing a few of the multi-national they’re ready and not when they’re told to be ready,”
whose obligation it is to ensure there in more recent times,” Marriott platform with deep-seated Algo corporates express interest as well.” Dweck said.
is some liquidity,” he said. said. But he argued that was more a capabilities available across multiple
function of the introduction of high asset classes. This process is only just David Michell, CEO of Australia’s Finance and Treasury
The scars from the 15th of January frequency traders in North America beginning and I think these clients Association, said he could see how FX algos might be
are still fresh, but once volatility and Europe, and not the degree of are really just dipping their toes in used by the Future Fund (Australia’s sovereign wealth
normalises, algorithmic trading is participation by real money asset the water at the moment.” fund) and hedge funds servicing family offices. He said
expected to become more popular. manager clients or multi-nationals in he would be surprised if pension funds or corporates
Australia. Super funds and some pension were using them at the moment, with the possible
Marriott said: “If you look at the funds were previously outsourcing exception of a couple of large multinationals.
benchmark fixing windows that “One of the beauties of our execution and various investment
have just been extended from one algorithmic e-piece is the depth of decisions to third parties. “And Michell noted that most corporate FX activity is
minute to five minutes, there are a liquidity in core competency that we transactional and directional, and treasurers are not
lot of people looking now to deploy will be supplying to our customers actively managing, let alone trading, with their surplus
algorithmic executions around those is consistent on a 24 hour basis. So liquidity.
fixings to manage risk.” what I mean by that is the ability
to take our core franchise and use “Arguably in a low growth low interest rate
Razaq also expects slow growth in that as liquidity throughout client environment they should look to add value to
Australia. reach across Asia as a function of liquidity balances using a variety of tools,” said Michell.
our super regional strategy leaves “For instance Australian corporates use money market
“We do have clients in Australia us very well placed 24 hours a day funds a lot less than their peers in North America and
which range from corporates who in those core competencies to be Europe. I would expect to see more take up in such
trade on an ad hoc basis to fund supplying that liquidity.” ‘vanilla services’ before algo funds.”
managers who trade daily,” he said.
“Client demand is not in the upper Marriott said ANZ would not try to Dweck said Trading Screen’s platform is focused on
scale compared with European and be “everything to everyone” but institutional FX flow. It handles the complex workflows
US counterparts. The APAC region that it did have core competencies necessary for asset managers across multiple asset
David Michell
tends to be further behind in terms across Australia and New Zealand, classes, so it tends to be used by hedge funds and long
of adopting new technology and and it would look to specialise in “Australian corporates use only asset managers rather than corporates and retail.
taking market risk.” certain Asian pairs. money market funds a lot less “We are now seeing specific interest by our clients to
than their peers in North have control over their Algos. So certainly people are
Razaq said that as FX is a 24-hour WHERE THE DEMAND WILL SHOW America and Europe.” interested in us building models independent of the
OTC market, by giving clients direct Alan Dweck, head of FX Asia Pacific liquidity providers available on our platform.”
8 March 2015
S including CME Europe, Eurex and providers have already looked to
W
Singapore Exchange, have launched cater to the growing demand in
E
I FX futures in recent years in the recent years.
V
Y hope of capitalising on any decline
R in the swaps market. For Christian Hauff, chief executive
T
and co-founder of Quantitative
S
U “If FX non-deliverable forwards are Brokers, which specialises in fixed
D
required to be cleared, FX futures income and futures markets, the
N
could see a tremendous boost. light-bulb moment came after
I
Under that scenario, the demand for working in a number of senior
algos would grow quickly, leading to e-commerce roles at Barclays and
further advancement of strategies,” Bank of America in the years leading
predicts Kevin McPartland, head up to the financial crisis. During his
of market structure research at time at Bank of America, he and co-
Greenwich Associates. founder Robert Almgren recognised
Kevin McPartland an opportunity to develop more
DRIVE FOR EFFICIENCIES sophisticated execution models and
“If FX non-deliverable forwards The Tabb Group research found transaction cost analysis for the
are required to be cleared, FX that 38% of futures commission fixed income and futures markets.
Capturing new opportunities in futures could see a tremendous merchants (FCMs) expect a
boost. Under that scenario, significant increase in US futures As a registered broker-dealer,
volume as a result of OTC derivatives Quantitative Brokers offers a suite
the demand for algos would
market regulation, while a further of four algorithmic strategies,
grow quickly, leading to further
futures markets with algorithmic
50% expect a marginal increase. As including an arrival price algo and
advancement of strategies,”
the market grows, it is the drive for an algo that aims to beat volume-
efficiencies and cost savings that or time-weighted average prices.
execution strategies
This projected acceleration in the drove the evolution of algos in cash Having done its first trade in 2010,
growth of algorithmic futures markets that will spur the same the firm has seen momentum
execution could be driven partly trend when it comes to futures. building in recent years as its
by the more general growth in the client base has expanded beyond
futures market, as regulation of “Historically there has not been the systematic CTAs it initially
Banks and brokers are seeing growing demand from CTAs to execute futures over-the-counter derivatives drives significant adoption of algos in the targeted. The firm now counts a
buy-side firms to seek cheaper futures market, but as the flow broader range of funds, including
algorithmically, but the most successful providers may be those that can offer customised
alternatives. A string of exchanges, becomes more electronic and moves discretionary as well as systematic,
strategies. Joel Clark reports.
more quickly, trade sizes get smaller among its client base.
and interacting with that liquidity
Of all the uncertainties surrounding growth of the futures market. algorithmic tools also looks set to becomes more challenging. At that “We don’t do any proprietary trading
the evolution of financial markets As trading volume bulges and grow. point, there is demand for more or principal activities, only agency
under the weight of regulation, participants seek out the most sophisticated execution technology,” algorithmic execution, and our
one of the few things that most efficient execution channels, the “When you reach a certain level of says Larry Tabb, chief executive of clients have been able to materially
participants feel sure of is the likely popularity and sophistication of activity in futures, using algos starts Tabb Group. evidence the value we can deliver
to yield quite significant benefits in reducing slippage and cutting
up and cost savings. We moved to While Tabb’s research suggests the transaction costs – it’s a meaningful
o
B Gr intraday trading a few years ago growth of futures algos is still in saving per unit traded, which can be
B
A and now that our trade frequency its early stages, a small handful of easily measured,” says Hauff.
e: T
urc has increased, we do everything
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S algorithmically to ensure best
S
o
execution,” says Michael Mundt, u
rce
principal at Revolution Capital : Fid
Mcoamnmagoedmitye ntrta, da iCnogl oadravdisoo-rb (aCsTeAd) . Christian Hauff essa, TA
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According to research by Tabb “We don’t do any proprietary rou
trading or principal activities, p
Group conducted last year, algo
only agency algorithmic
execution accounted for just 4% of
execution, and our clients have
buy-side futures volume in the US in
been able to materially evidence
2011, rising to 11% in 2012 and 12%
the value we can deliver in
in 2013. That figure was expected
reducing slippage and cutting
to grow to 20% in 2014 and 30% in
2015. transaction costs…”
US Buyside Futures Volume by Execution Channel Futures Algorithm by Geographic Region
10 March 2015 March 2015 11
S the behaviour of a trader who has up For quantitative hedge funds that
EW the time, experience and intuition BB Gro have historically built their own
VI to maximise spread capture and e: TA algos and may be reluctant to use
Y minimise market impact. The aim is ourc commoditised tools, the potential
R to create a strategy with the right S to source customised technology
T
degree of flexibility so that users can could be an effective compromise.
S
U set their own appetite for risk and And as the sophistication of bank
D
market impact,” says Peter Ward, and broker provided tools rises, it
N
global head of futures and options makes less sense for firms to spend
I
execution services at JP Morgan. significant resources in-house.
TCA “Market markers will continue to
As with any market, the provision develop their own algos, because
of algo execution tools must go they need to be developed
hand-in-hand with transaction specifically depending on how they
cost analysis (TCA), to enable make markets, but for other buy-
buy-side firms to benchmark their side firms, it is getting better and
performance and show proof of cheaper for them to use sell-side
best execution to their clients and algos rather than spending money
shareholders. in-house,” says Tabb.
In the long term, while there will
always be points of differentiation,
most participants and observers
Futures Algo Strategies and Estimated Percent of the Market share the view that algo execution
is poised for growth in the futures
The value of TCA depends to some extent on building up a
market, which can only be good
reliable data set from historical orders
for our algos. We had the benefit way they did. This kind of analysis is news for providers.
of building from scratch so we were crucial if firms are to really benefit
VALUE OF ALGOS bid-ask spread (being forced to buy able to design the best visualisation, from algos,” says Ward. “Algo usage by investors in
For Mundt of Revolution Capital at the offer price or sell at the bid). with greater accuracy and precision futures and more specifically
Management, the value of algos can than some of the legacy providers,” CUSTOMISATION FX remains limited, despite the
be distilled down into how much “Many of the early algos in the says Hauff of Quantitative Brokers. Offering some degree of high level of electronic trading.
can be saved when putting on and futures market had been ported customisation is also likely to be an As such, a huge opportunity still
taking off trades. Often that means across from equities and tended Developing TCA technology is area of differentiation between algo exists for algo providers that can
finding a strategy that can strike the to cross the spread a lot – in the somewhat more straightforward in providers in the future. While the improve investment outcomes for
right balance between a passive and futures market, the spread is much Peter Ward the futures market than in spot FX, most popular algos have become their clients,” says McPartland of
active approach to avoid crossing the bigger than in equities, so it wastes because exchanges provide reliable commoditised over the years, many Greenwich Associates.
a lot more money. A good algo “We are working towards market data that can be used as a CTAs are seeking solutions that can
needs some passivity without being marrying up signals with order benchmark. In the FX market, TCA meet the specificities of their own
so passive that prices start running placements, so that clients can providers have found it harder strategies.
away from it,” says Mundt. see how each order and slice to deliver credible services when
performed and review why liquidity is fragmented across so Revolution Capital Management
For providers, it became clear that individual orders traded in the many different platforms and there has developed a hybrid approach
the specific features of the futures way they did.” is no consolidated market data in which it uses banks’ off-the-shelf
market called for a different available. offerings as a benchmark, but looks
approach than the VWAP and TWAP to deploy more customised algos to
algos that have been widely used in The value of TCA depends to some JP Morgan has invested heavily suit the specific requirements of its
the equity markets. extent on building up a reliable data in TCA to support its electronic trading programmes.
set from historical orders, which businesses. Through the JP Morgan
J.P. Morgan last year launched a clearly takes time, but innovative Markets portal, users can slice and “There is certainly some
futures algo known as Aqua, which technology and user interfaces also dice their order flow to analyse commoditisation of strategies
is designed to optimise execution play their part in illustrating to a performance against various and you tend to get more or less
across a large range of futures range of audiences the economic benchmarks, and Ward believes the same results from one bank
Michael Mundt markets to which it is connected. value that can be achieved through there may be value in developing to another, which is why there is Larry Tabb
Aqua uses a number of signals algorithms. more detailed post-trade analysis. a move towards customisation.
“A good algo needs some to determine how aggressive or “We are working towards marrying The advantage is that we don’t “…for other buy-side firms, it is
passivity without being so passive it should be, in keeping “We have invested heavily in our up signals with order placements, so have to spend time and money getting better and cheaper for
passive that prices start running with buy-side demand to control TCA platform over the years, and that clients can see how each order building algos ourselves, but can them to use sell-side algos rather
away from it,” impact, capture spread and source used it initially to stimulate debate and slice performed and review present banks with our wish list of than spending money in-house,”
liquidity. “Aqua effectively emulates internally about the best designs why individual orders traded in the functionality,” says Mundt.
12 March 2015 March 2015 13
S any market environment. The suddenly abandoned it, creating
E
V worst market conditions for us another artificially distorted price
TI are periods of low volatility with environment. This is one of the more
C low intraday price dispersion. The respected institutions in the world.
E
P best market conditions are when As such, it was a big surprise, hence
S
markets are noisy, boisterous and the significant market overreaction.
R
E volatile. It is interesting to note that And it’s interesting to see that many
P
this is almost inversely correlated of the Swiss franc crosses are today
E
D to equities which typically thrive in back to similar levels to January 14th.
I low volatility and suffer in periods We owned some positions before
S
Y of high volatility – so, by design, we that announcement. We had found
U
make an excellent portfolio sterling weak and Swiss franc strong
B
diversifier for many investors who going into the overnight session, so
have large equity portfolios. we were long CHF and short GBP into
the move. All told, the models did
As you can imagine, central bank what they’re supposed to do and we
sponsored quantitative easing made made a relatively outsized gain.
our life difficult over the last couple
of years. G7 FX volatility hit an AC: Now that volatility seems to be
all-time low on 3rd July 2014. In coming back, what does that mean
the second half of the year the for your trading?
US began to exit QE and as policy
The Eleuthera formula: between central banks diverged, PB: Markets are in an almost
volatility rose towards its long-term perfect place for us to make money.
average. As such our performance Volatility is like Goldilock’s porridge
also lifted back into our expected in the sense that you don’t want it
technology + trading = target range. We are up around too hot and you don’t want it too
14% in the first couple of months of cold, you want it just right. We are
2015. We do need price movement now around the multi-year volatility
to generate trade opportunities and averages for the developed G10
opportunity
thankfully price dispersion amongst markets. That is really a very good
the developed market FX pairs has place to be because it means that
returned. During this period of the major liquidity providers to the
artificially suppressed trading daily market – basically the top 10 to 12
trading ranges we created several banks and a couple of HFT firms –
new models to cope with this new are happy to price us competitively
When the blue blood Wall Street firm Kidder, Peabody & Co. set up a global fund management intraday trading. In that way we paradigm. Having traded through in market conditions which allow
business in the mid-1980s, it tapped one of its new young stars, Philippe Bonnefoy, to look after avoid the large sudden drawdowns many market crises and abnormal them to effectively capture the price
that are common in trend following periods we live by the motto of spread. Most of the big banks have
international equities. Overseeing such a portfolio meant managing foreign exchange exposures
funds where trends reverse and the the US Special Forces: “Improvise, an algo business themselves, which
and for Bonnefoy it was love at first sight. Within a few years he joined a proprietary trading losses that are generated in periods Adapt, Overcome.” is systematically auto-hedging their
firm that capitalised on a volatile and fast-changing macro trading environment for the next of range trading. We are not market positions. They accommodate
correlated to any other asset class or AC: A lot of firms had to improvise client risk transfer business then
decade. In the mid-2000s, Bonnefoy started a venture using algorithms to seize short-term FX
any other currency manager. in January when the Swiss National they do one of three things. They
opportunities, a trading technique he has been honing ever since and which is central to the
Bank dropped its bombshell. add to their own proprietary trading
success of his firm Eleuthera Capital AG. Throughout the years, one thing has been constant: an AC: Your website says Eleuthera Whether they were able to adapt book, they cross the positions to
targets an average annualised and overcome is another matter. other clients (and pocket the spread)
appreciation for how technology and trading can go hand in hand. Adam Cox catches up with the
return of 15-25%, with a target How did you fare? or they sell out the position to the
Zurich-based fund manager.
annualised volatility of 10- market often across multiple trading
15%. What are the main strategies PB: The SNB, with whom we’ve venues. This can also be done by
AC: Let’s start by talking about how When we started, there was basically The objective of our trading you deploy via algos to achieve met before, seemed to violate the changing their pricing of currency
Eleuthera uses algos. Could you a Reuters terminal, a T-1 phone system is to produce attractive, that? What sorts of timeframes and one common tenet that all central pairs to become the best bid or offer.
describe the main objective and cable or satellite dish, we had telex uncorrelated risk-adjusted returns trade frequencies are involved? banks have, that is they view their If nothing is going on in the market
how the algos you use go about machines in the trading room and that are not overly factor dependent role as to provide orderly markets it’s challenging for them both to take
achieving it? a computer screen connected into a and generate these positive returns PB: We have four main model for the market participants. This that client business on board at tight
chilled computer room somewhere through the cycle. Unlike much of groups: mean reversion, short- surprise announcement, three days pricing and to exit these positions
PB: We have traded currencies for 30 in the building. Now every price tick the peer group we do not want to term trend, short-term breakout after giving a speech saying that profitably. So, unusually low volatility
years. The development of the use of the 30 developed market currency rely on carry and we do not want and statistical arbitrage. In the this currency peg was a core part makes it harder for them to trade
of computers to assist, analyse, back- pairs we follow is consumed by our to rely on trend. In order to make deployment of these model groups of their policy, was really bizarre. profitably and to have an appetite
test and now manage the trading co-located servers in London and these returns more consistent we our objective is to be able to First, they created an artificially for this risk transfer function. As
process has been extraordinary. NY where it is analysed and filtered. mainly specialise and focus on generate positive returns in almost constrained price environment then a client that is bad for us. High
14 March 2015 March 2015 15
S be predatory or parasitic it would price changes over a 10-year period. If is less helpful to analyse. The last 10 PB: My partner, Riadh Fessi, and
E
V be a lot harder for us to generate we were a long-term trend follower years also encompasses almost every I have been developing trading
TI profitability as the pricing we that only analyses price activity on single type of market – financial strategies and coding algos for
C received from our counterparties a daily basis One of our tests would crisis, equity flash crash, strong trend, eight years. They are all designed in
E
P would become more defensive. In be the equivalent of a doing a test no trend, record high volatility and house. They are reviewed regularly
S
the past we did remove an algo of 50 million trading days, or about record low volatility and now the SNB and we will update the models if
R
E because we felt the flow was too 200,000 years. event – so it is a great data set with we believe that we can find ways
P
“hard” for our counterparties. It which to work. to further reduce risk or screen out
E
D was an interesting situation as this Our models are typically highly sub-optimal trades. We are always
I algo was executing a mean reversion filtered, multi-factor models AC: How do algos assist with risk thinking of new trading ideas and
S
Y “We began deploying algos in strategy which added liquidity to our containing a number of proprietary management activities? new algos with which to express
U
counterparties in times of market non-technical inputs so there is a lot them.
B 2008, initially as tools to assist
stress. The unexpected outcome of complexity in the filtering of how PB: All risk management is
our discretionary trading.”
was that our liquidity providers the models will look at each price embedded into a trading position AC: How much is automated? Do
were auto-hedging their own risk change. Each trade we do has pre- prior to entry. Each trade we you ever override the algos with
exposures so quickly that our liquidity determined volatility adjusted risk execute has its own distinct risk human decision-making?
that should have been welcome by limits and profit take objectives. Each return parameters. Position sizing
our counterparties wasn’t helpful tick will be sampled to see whether is determined by the risk budget PB: The process is completely
because they had already transferred a position should be entered, given to each of the models, which automated. There is no manual
the risk out to the market. This stopped out, profit taken, exited, in turn is then input into any trade override unless we believe that there
algo was profitable for us – but it or added to. That is the reason that which that model executes. There is is an issue with infrastructure which
was not profitable enough for us this backtest process can take so a predetermined volatility-adjusted negatively impacts the performance
to want to negatively impact our long. We only look back 10 years risk limit for each trade. This “stop” of the trading models. If the models
volatility forces their algo traders PB: The positive effect is that using trading relationships. We don’t have because the market micro-structure can be moved closer to protect open are operating normally we don’t
and their risk management to reduce algos can reduce our trading costs and a high frequency trading strategy has changed so much that we do not profits and reduce risk exposure but second guess them.
their risk appetite and potentially enhance our performance because which some liquidity providers may believe that price action pre-2005 it can never be moved to allow for a
widen spreads, which is further trade we can implement trades much find difficult to price. Our trading is relevant to today’s market. As position to have greater risk. AC: Looking ahead, what are the
friction for us. But at least in periods more quickly than if a human was flow is generally positive for our an example, in 2005 spot trading main technological changes that
of high volatility we have many involved. Indeed, one of the issues counterparties which is how we was mainly done by voice. Now AC: How are your algos developed? are likely to be important for the FX
more potentially interesting trading facing the sell side is how to stream want it to be. All participants in this it is almost entirely electronic. As Did you source any algos externally market and for firms such as yours?
opportunities. prices that do not put their human relationship need to be profitable. intraday price behaviour has changed and customise them or develop
trading clients at a disadvantage. enormously older price information everything in house? PB: The high frequency trading
AC: How long have you been using We have been told of conversations AC: Are you focused only on spot world suggests that we should
algos to trade the currency markets? where traditional traders have markets or do you algos to trade in always push for reduced trading
How has the usage evolved over complained that they cannot push the other markets such as forwards or and data transition times. This
time? How often do you tweak the button to trade fast enough because currency futures? is an area of diminishing returns
algos you use? by the time they have reacted to a where one will always have to scale
price movement that price has moved PB: We only want to trade markets up the technology to get the last
PB: We began deploying algos in away. As the trading latency with a where we know there will be millisecond or microsecond out of
2008, initially as tools to assist our number of our liquidity providers is consistent liquidity. As such we limit it. We’re not in the HFT business
discretionary trading. We quickly under 10 milliseconds, that is not a our investment universe to spot but we’re very sensitive to not
realised that using algos was a much problem for us. trading G-10 developed market wanting to be at the long end of a
better way to manage short-term currency pairs and cash gold. queue of people who are reacting
trading. Typically “tweaking” of the AC: What are some of the unique to news or getting stopped out of
models happens if we find new and factors involved in trading FX that AC: What kind of backtesting do a trade. Our servers are located
better ways to make our automated one doesn’t encounter in other you do? in the major data centres in the
risk management functions more markets and how do your algos world and hardwired to the banks
effective or if we can add further address those factors? PB: Our backtesting is so rigorous servers. This considerably speeds
filtering to improve the trade that we have several servers up price transmission and trading
selection process. We do introduce PB: A unique feature of the spot FX dedicated to backtesting 24 hours a execution. The extraordinarily leap
new models if we find strategies market is that as an OTC market you day all year. We had one test running in computational power each year
that can further diversify our trading are reliant on your trading parties recently that took almost three weeks means that our servers are able to
strategies such as in the recent streaming consistent tight pricing 24 to be completed running 24 hours a handle more models, more factors,
period of low market volatility and hours a day, 5 1/2 days a week. That day non-stop. We are testing every more inputs, more risk filters. That
narrow intraday price dispersion. means it is incumbent on us to have market tick for 10 years. Let me put is a huge advantage. In terms
a healthy symbiotic relationship this in context, to be conservative of how we manage the business,
AC: What are some of the issues, with our liquidity providers. We let us say that there is a tick change every day we are pushing ourselves
either positive or negative, that a spend a lot of time discussing how every five seconds (it can be multiples to become better than we were
fund such as yours faces now that our algo strategies work with those of this in a busy period). That means yesterday. And as they say in the US
weren’t factors in the past with firms that stream prices to us. If our for a 24 hour, 5-1/2 day week the Navy SEALS: “The only easy day was
respect to using algos? trading behaviour was viewed to data set could be around 50,000,000 yesterday.”
16 March 2015 March 2015 17
1) The strategy which needs
to be back-tested on the
historical data typically uses
different technology than the
same strategy running live.
2) As such, there is no seamless
transition from historical to
Save your FX data!
real-time data. Further, the
very concept of comingling
historical and real-time data
is unfortunately anathema
in many set-ups. This is
By Stuart Farr, President, Deltix, Inc. unfortunate as the benefits
of dynamic algorithmic
Firms on both the buy-side and sell-side which trade forex systematically or execute execution require just such
simultaneous access of both
discretionary orders algorithmically, require historical market data for strategy development,
real-time and historical data.
optimization, back-testing and simulation.
3) There is a difference between
back-testing and simulation.
The forex markets are unique in at will not be those that would have There is little point in performing Simulation usually implies
least two characteristics in respect of been offered directly to a specific TCA on market data with quotes Figure 1 – EUR/USD Aggregated Order Book for one hour replaying recent (hours,
available market data. Firstly, equity buy-side firm. unattainable to the firm in question! days) market data through a
and futures markets are fragmented Traditional, ex post, TCA is much trading strategy or algorithm.
but the cost and regulatory burden TIMESTAMP SYNCHRONIZATION more valuable when used in the Different in scale, back-
of launching new exchanges and A common, cross asset problem, context of pre-trade and real- testing typically means
dark pools means that the number to using purchased historical time TCA. The ability to change observing (and subsequently
of these venues is inherently more market data (even when it can dynamically algorithmic execution altering) the operation of a
static than the OTC forex markets. be procured) is that of timestamp “in flight” is a powerful capability strategy or algorithm over
In contrast, sources of liquidity synchronization. This is a specific which by its very nature dictates months of years of data.
in the forex markets span global case of what might be termed that historical market data is in fact
and regional banks, ECN’s, trading “infrastructure idiosyncrasies” in recorded data from the same feed as
technology platforms and buy-side which market data originating is used for live trading. CONCLUSION
firms. Sources of forex liquidity are from the same source will be The good news for forex trading
more dynamic. recorded slightly differently by The screenshots opposite are taken participants on both the buy-
virtue of differences in the distance, from the TimeBase time-series side and sell-side is that, whilst
Secondly, forex quotes from a connectivity and hardware and database. They depict historical there are no formal exchanges,
given bank differ between buy- software recording devices. In the EUR/USD for the same time period three data centres in New York,
side firms according to individual case of forex market data, the large (one hour on March 11, 2015) in a London and Tokyo have become
customer characteristics such as number and variety of liquidity consolidated order book comprising the de facto physical locations for
credit quality, assets, trading volume sources exacerbates this problem. several banks, technology platforms Figure 2 – EUR/USD Order Book for the same one hour from a global bank accessing global forex markets.
and trading style. This and the lack and ECNs (Figure 1) and individual Major providers of liquidity and
of an exchange model in the forex These characteristics of historical order books for a constituent bank technology have made “points of
market, means that historical forex forex market data are less and technology platform (Figures presence” in these data centres
market data typically is limited to troublesome when just using 2 & 3). The red and green strips are meaning that typically a firm
quotes and does not include actual daily forex rates but the problem different levels of bid and offer just needs to be present in one
trades, limiting the options for back- becomes more important as the quotes: the length of the strip of them and at worst three.
testing and simulation. required granularity of market data indicating the time duration the Also, there is now software
increases (meaning more frequent quote existed at that level. Even commercially available whose
As such, the problem of procuring quote data is required). In the case cursory visual inspection reveals sole mission is to connect to and
historical forex market data is a of back-testing intra-day trading significant differences that the intra- make available multiple sources
much more difficult proposition strategies and algorithmic execution day and algorithmic trader would of liquidity comprised of the
than for equities and futures where strategies, purchased forex data is want to know. multiple types of venues. When
it is straightforward to purchase of little value. Similarly, transaction coupled with built-for-purpose
historical market data directly from cost analysis (TCA) becomes much The traditional manner of recording time-series data management
exchanges or from several reputable more relevant when assessed within live data is to stream to data files software, forex trading
suppliers of such data. Several forex the context of what was available, for subsequent retrieval. This works participants can now readily
ECN and technology platforms make quote-wise, and available across but utilisation of historical data deploy the most appropriate
historical market data available, but multiple liquidity providers for a recorded in this way usually suffers method of accessing historical
as noted above quotes from banks specific buy-side firm. from three deficiencies: Figure 3 – EUR/USD Order Book for the same one hour from a trading platform market data: recording it!
18 March 2015 March 2015 19