ALGORITHMIC FX TRADING
Any decision should take into account current market
conditions (liquidity, volatility), upcoming structural
events (fixings or option expiries) and the amount of
risk the trader is prepared to carry while an execution
is in process, says Dalton. And increasingly this
decision is leaning towards customised algorithms
rather than the commoditised, off-the-shelf products.
“Our experience has shown us that customised
strategies are going to do a better job than say a vanilla
time-slice or pegging solution because they are far
more adaptive to market conditions at the time of
trading. I would take this a step further and state that
off-the-shelf solutions, are more likely to be
mechanical than intuitive and therefore require a
greater degree of oversight by the trader when in use.”
Identifying the best combination of algorithms
In terms of how FX tools can help to identify the best
combinations of algorithms to adopt, market
experience is vital says Dalton. “The market has Kim Bang
experienced sufficient distortions in recent years to “In choosing a good implementation algo,you want to find a
become well aware of that fact that what works on one provider with access to high quality market data, an extensive
day, may have to be discarded the next. What we've network of liquidity venues and market participants.”
learnt can be applied at both a macro and micro-
structure level. While retrospective analysis and back
of customised versus off-the-shelf algorithms dependstesting are mandatory steps in the development cycle,
very much on how they are going to be deployed.there is no substitute for the ‘live markets’ where road
“The first question relates to the intended use. If it istesting must be completed on algorithms before
for trade idea implementation, then there are ahanding them over to clients. In this business you
number of very good broker-provided algos at yourneed to be able to monitor progress of any order in a
disposal,” says Bang.real-time environment. The tools available to us are
extremely nimble and subtle adjustments to logic can
“In choosing a good implementation algo, you want tonow be deployed within hours as opposed to days or
find a provider with access to high quality market data,weeks.”
an extensive network of liquidity venues and market
participants. You would want the necessary tradingDalton also envisages that as advanced FX trading
tools at your disposal to source liquidity across multiplestrategies such as statistical arbitrage continue to grow,
venues with maximum spread capture and minimalthen there will be an increasing amount of focus on
market impact. On the other hand, if the algo isthe techniques required to ‘cloak’ an execution on
intended to be an alpha-generating trading strategybehalf of a client. “There are various ways to approach
designed to buy low and sell high, then you need tothe problem, while order routing and placement
invest in proprietary research and development.”strategy is important, the introduction of dark pools of
liquidity and internalisation models will ensure that
There are firms who can provide market data andthe sophistication of methods applied increases rapidly.
back-testing for complex events processing (CEP) saysAside from the techniques that evolve, this problem
Bang and he describes how Bloomberg’s Tradebookwill also have an impact on the structure of the
product provides access to Bloomberg’s market datainterbank market. Flow will be attracted towards
over an API with a number of base trading modulesexchanges and broker venues that can offer good
for currency pairs, multi-asset class trading, newsliquidity as well as dealing protocol that protects
releases and economic announcements, and ‘if then’against undesirable behaviour.”
trading strategies. These trading applications can be
customised and automated leveraging Tradebook’sKim Bang, president and chief executive of Bloomberg
suite of execution DMA and algo strategies.Tradebook, agrees with Dalton’s view that the choice
|66 october 2009 e -FOREX
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