ALGORITHMIC FX TRADING
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time and the core cycle of liquidity of a currency on any given day, provided there is a sufficient level of liquidity available in the first place. We have undergone extensive work on transaction cost analysis and benchmarking and MSFix is an embodiment of that work,” says Aston.
MSFix is a principal-based offering. While the FlowWAP algos reflect the characteristics of the FX market, there is also a demand among some traders for algos such as implementation shortfall and participation algos. As far as Aston is concerned algorithms have to be engineered for each client and their trading preference.
Paul Aston “Algos essentially address three preferences –
liquidity, price and time. Te client has to be very clear about what their preference are and the algos have to match these preferences.”
is a process that takes place over time. It is an ongoing statistical analysis whereas a price is a single snapshot of a particular time in the market’s daily liquidity cycle. Furthermore, in an OTC market there is not right price. An individual price could be affected by a whole range of factors – some of them observable and some of them not.
Morgan Stanley’s primary offering in the FX algo space is MSFix which is aimed at large asset management clients looking to execute large block orders. “We use an algo called FlowWAP which is analogous to the equities-style VWAPs,” says Paul Aston, Executive Director at Morgan Stanley. “Te difference is that MSFix users will execute orders in volumes according to the relative market flow rather than at set volumes. By tracking the average intra-day liquidity cycle in each currency, MSFix aims to minimise market impact and minimise the possibility of trading on extreme prices. It is about ensuring a proportionate volume for execution.”
Te liquidity profile that Morgan Stanley compiles through its Quantitative Solutions and Innovations Group is based on a number of sources across the FX market. “Tis data allows us to estimate the arrival
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He says, “Algos essentially address three preferences – liquidity, price and time. Te client has to be very clear about what their preference are and the algos have to match these preferences. Whereas the basic TWAP algo only focuses on time, the MSFix algo is focused on both time and liquidity. In both cases, the algos act as price takers. In contrast, a target price or implementation shortfall algo would need to prioritize price, time and liquidity to various degrees.”
FX Fifty Five, the FX agency of Market Securities - Kyte Group, is an agency broker that offers algorithmic trading services to hedge funds and other professional traders. In the FX market it uses a white labelled version of FlexTrade’s MaxxTrader product and its FX platform is hosted in LD4 where it cross connects with banks via a physical cable connecting its own servers to those of the banks. Kyte Group acts on a pure agency model and therefore all of its flow is passed to its liquidity providers.
“It is a business decision for us to remain an agency broker as we want to be on the side of the largest liquidity providers who are the top tier banks,” says Nathan Halfon, head of FX at FX Fifty Five. “Te agency model gives a very transparent e FX service as it avoids any conflict of interest and provides total anonymity to the buy-side. Te liquidity providers only face the bank acting as the central counterparty. Tis differentiates us from brokers that act as principal to the trades and therefore internalise the best portion of the flow and pass the rest to the banks. We are passing all the flow to the banks with no intervention in order to achieve a better relationship with them.”
Passing all the trades straight through demands a thorough policing of the flow, says Halfon. “Te challenge is ensuring that we are distributing the right
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