>>> Use of analytics in FX
Te use of analytics in FX has three different perspectives to it – trading performance, risk management and cost analysis. All three are of equal importance to most firms, although the toolsets and applications available to traders are generally focused in one of these specific areas. For example, the trading performance of a firm is being continually subjected to sophisticated analytics to determine the quality of execution, especially given the growing focus on low latency and high speed execution that is prevalent among the users of trading algorithms in the FX world – something that is no longer exclusive to a handful of high frequency traders but is in common usage among many institutional FX trading firms.
Nick Pratt
Analytics are the basis of any trading strategy. This is, of course, an obvious statement but, as Nicholas Pratt reports in this feature, the realisation that a more intelligent approach to the use of analytics leads to a more intelligent trading strategy is increasingly apparent in the FX world.
more than 60% of FX is traded electronically and this figure is set to grow to over 90% by 2014, thus equalling the level of electronic trading in the equities and futures & options markets.
A
Tis increase in adoption is sure to spark fierce competition between the providers of FX trading platforms, both from a bank/dealer perspective and among the software firms that supply the technology for these platforms. Terefore one way for firms to differentiate their offerings is likely to be the addition of built-in analytics to these trading platforms. Te Grey Spark report cites a number of factors that will influence buy-side dealers’ choice of broker, such as competitive price and also functionality of trading platform, particularly if buy-side dealers are going to be using a single broker’s platform across all asset classes. And this functionality includes the provision of client static data, instrument static data, market data distribution and core pricing and analytics.
report by consultant Grey Spark Partners titled “Trends in e-commerce and electronic trading”, conducted in 2011, showed that currently
Tese performance-related analytics are being employed across the entire trade execution lifecycle so as to get a true and accurate picture of latency rather than partial snapshots of specific elements of an FX trade – an approach that has only limited use. Similarly, analytics are being used in a historical context so as to help with the back-testing of algorithmic trading strategies and to help firms examine both the effectiveness of their algos and the wisdom of their chosen strategies.
Te cost of transaction also has to be considered when it comes to assessing the effectiveness of algos and this is something that it is just beginning to gain meaningful adoption in the FX world through transaction cost analysis (TCA), something which is challenging enough in the exchange-based world of equities but even more difficult to amass in an over- the-counter world like FX.
Finally, the use of ‘deep dive analytics’, three of the most popular buzz-words to appear in 2011, are being deployed by a number of high performance FX traders to improve their risk management applications.
Analytics toolsets
So what analytical toolsets and applications are now becoming available to help FX trading firms gain better insight into the overall performance of their trading platforms and trade execution?
“Toolsets and applications both exist in trading platforms internally and for the more sophisticated clients we are seeing dedicated reporting and tick capture systems developed to track a variety of key performance factors,” says Paul Allmark, head of Europe, for Tomson Reuters’ Marketplaces business.
january 2012 e-FOREX | 57
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