ALGORITHMIC FX TRADING
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liquidity to the right customers. We manage it using direct APIs with the banks to cross connect to their servers and publishing anonymous identifiers in order to be able to communicate with the bank and place the right identifiers with the right streams. Tis way we gain the trust of the banks and they provide us with better pricing.” Te Know Your Customer (KYC) due diligence process is therefore crucial in order to know what kind of trading style the end-customer uses, says Halfon. “Once a thorough KYC process is undertaken, we can then connect the customers and offer them a competitive price that also protects the liquidity providers.”
Hybrid approach
While some firms adopt an agency-based broker model and others are principal-based, there are some providers offering a hybrid approach. J.P. Morgan’s AlgoX solution was launched in late 2009. “Te thought was that banks had liquidity based on either an internal model or an agency model,” says James Taylor, global head of e-FX distribution. “AlgoX is a hybrid model that offers liquidity from both our own internal order book and also a range of ECNs.”
Te fact that J.P. Morgan has a large client franchise is beneficial for AlgoX clients interacting with the internal order book. In addition, clients’ orders passed outside the bank will be seen in the market as regular J.P. Morgan FX trading flow and as such entitled to excellent lines of credit with the majority of inter-bank counterparties.
Many of the banks’ FX algo models were based on the internal order model prior to 2008 (the likes of UBS and Deutsche Bank) but beyond this point the likes of Credit Suisse brought the agency model into the FX market. As far as Taylor is concerned it is not so much that clients prefer one model to the other but by offering both approaches, J.P. Morgan is able to present a wider pool of liquidity and a greater range of available prices.
“Most clients simply want to take the best price available and will leave it up to the algo to decide.
136 | october 2011 e-FOREX
Tere has been some extra intelligence built in and historical data enables us to put more factors into the decision-making – such as rate of rejects and the actual liquidity that is available which involves distinguishing between liquidity and phantom liquidity where a market participant will put a price out in a small amount to gauge the level of interest in the market rather than to be executed against. Information leakage is still a big concern for many clients”, says Taylor.
J.P. Morgan also offers a crossing network for FX clients (MorganDirect Match) where clients can show interest in orders without going public or without producing any market data. “Although it is a service available to all clients, it is especially attractive to those operating in less liquid currencies where more open trading activity may be more conspicuous.,” says Taylor.
Tere has also been
new order types added to the traditional collection of
TWAPs, Timeslicers, Trailing Stops and
Floats. For example, there is J.P. Morgan’s ‘Panther’ algorithm, which operates almost completely by stealth in the market and also ‘Sliceberg’, which uses multiple ice bergs. Clients are also able to combine and link algorithms. Te aim, says Taylor, is to be more intelligent about executing the orders to get a better fill.
For some clients, the primary use of algo orders has been to add more stealth and minimise their execution footprint. However, the majority of smaller trading shops, are just looking to get their order done, says Taylor. “Tey would probably use a more passive order type like a Timeslicer, whereas the banks and the larger buy-side firms who have dealing desks would potentially split the order up themselves. Some clients want to execute against a benchmark so that they can show their investors that they achieved an average price. Others may use the algos to make a market. Tey are getting direct access to the interbank market through our algos which makes them powerful tools. So there are some safeguards built in.”
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