ALGORITHMIC FX TRADING
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the FX leg of a multi-asset trade internally by sending it to their FX spot desk. Depending on the order, it may be executed externally anyway but they key to making that decision is the transparency and visibility that a bank has on its own positions and internal order book. Tis is where customisation starts to play a role.”
Customisation
For the less liquid currencies and products, customisation also becomes an issue, says Hubscher. “In terms of liquidity aggregation and smart order routing, it is not just about knowing where to look for liquidity but to ask the right questions once you get there. For highly liquid currency pairs, it can simply be a matter of streaming quotes. If you have a good relationship with a liquidity provider, this can affect the quality of the liquidity, especially in less liquid currency pairs. So what the algo developers are looking to do is automate that relationship aspect. It is a natural extension of the development work that has already been done and is a case of upgrading the clients’ set-up and fine-tuning and customising
their algorithms so that they are specific to each of their counterparties, says Hubscher. “For example, we recently had a client where we installed a speed- bump. Tey were sending orders to ECNs and single banks but by the time they were getting the single bank orders back, in order to hedge the positions, the market was already moving against the bank. So we put in a speed bump to give the bank more time to be able to hedge its positions.”
Regulation
Regulation is another area of increasing interest for the FX market. It is an area that the FX industry has watched from a distance for some time but it is now beginning to address the issue, says Hubscher. “Te general point of view was that the FX market had been fine, there had been no major crashes and therefore did not need any major reforms. But now there is nowhere left to hide. And with FX swaps, the mandates are increasing for trading on new centralised platforms.
“I think the introduction of swap execution facilities (SEFs) will lead to an increase in algo trading but I don’t know how dramatic that increase will be. All of the things that SEFs necessitate, such as standardised instruments and competition between execution venues, are suited to high frequency or algorithmic trading. But there needs to be the market interest in the instruments, as has been the case with credit derivatives and interest rate swaps, as well as the various measures needed to protect market integrity, such as high speed controls and pricing transparency.” Tere are precedents in the FX market, says Hubscher. “With spot FX we realised how quickly you could add automation to an OTC market. In most cases, you can automate the easy parts and then flag up the high- volume orders to be traded manually so that a kind of hybrid market develops.”
Dan Hubscher
“All of the things that SEFs necessitate, such as standardised instruments and competition between execution venues, are suited to high frequency or algorithmic trading.”
138 | january 2012 e-FOREX
Another development in the algorithmic trading market is the ever decreasing shelf-life of the algos, says Hubscher. “It was said that the average lifespan of an equities algo was three months and we are now seeing the same thing happen with FX as traders discover new opportunities. But the important issue is not how long the algos last but whether you have the tools to determine when your algos are no longer effective. For example, are you still getting the fill rates? Do other market participants recognise your trading strategies? Are they able to predict your executions? It is then important to put customisation
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