ALGORITHMIC FX TRADING
options market is by people trading gamma. What we have is an algo that understands that gamma market. If you tell it what your gamma profile is, it will decide when to trade for you – it is automating the trading logic.”
Ed Mount
“Tere is more awareness of transaction cost across our entire client base and therefore transparency is vital.”
designed for the spot FX market and can be used in various ways including gamma hedging for FX options. “We have used RBS Agile internally for almost two years where it was originally designed for the hybrids desk to execute its static gamma,” says Tim Carrington. “I arrived at RBS 13 months ago and we started to develop a second version for clients. We beta tested during the first half of this year and officially launched in the third quarter. I genuinely believe it is the only product of its kind in the market at the moment.”
What Carrington believes is unique about RBS Agile is the fact that it can be laid directly onto the client’s desktop, enabling them to control the execution experience rather than being reliant on vendor support staff. “Up to now the focus on algorithms has always been on the speed of execution and how much you can execute, whereas the decision to execute has been entirely manual. Our algorithms understand the concept of gamma (the rate of change in respect to the underlying asset’s price – for example, the change to an FX option delta if the underlying FX spot has moved). Gamma trading is an increasingly prominent market in FX – 95% of the FX spot traded in the FX
142 | january 2012 e-FOREX
“Developing these customised algos is something that we get very involved with. We provide the resources of the bank (our quantitative research people and structuring sales people) to come to the conclusion that we can model the clients’ decision- making,” says Mount. “Te clients are able to work with our technology, put in their own parameters and automatically know that their wishes will be followed by the logic of the algorithms that they have helped design. It is then a constant tweaking of the algos as the client becomes more familiar with both the execution results and their own trading goals. It becomes almost a revelation for the client because we take the emotion out of the experience by programming it into the logic and the results of the transactions tell the story of how the client is making their decisions.”
Self catering
Some clients are more suited to self-catering than others, says Carrington, even if it is a small section of the overall market. “Tere are some very sophisticated clients, among corporates and not just high frequency traders, who will want the capacity to tweak things themselves to optimise their own returns. For example, some corporate treasurers have a very good understanding of how algos work and have their own quant teams, not necessarily to build their own algos but to oversee that tweaking process and to understand when to turn one algo on and another one off.”
Will derivatives reform and the emergence of swaps execution facilities help to increase algorithmic trading in the FX market? “One of the capabilities of RBS Agile, an algorithm that understands derivatives, is that it gives you a degree of option replication for cash,” says Carrington. “If the OTC market becomes very regulated then I think you will see an increase in demand for algorithms that can replicate optionality and options portfolios.”
FX options is a blue ribbon business at RBS says Carrington so there is a clear intention to develop tools for this market. “We are also looking to
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