Algos: choosing the right horse for the right course

Liquidity and volatility regimes play big role in performance, BestX quants show.

In the world of foreign exchange algorithms, received wisdom is that aggressive strategies are fast, but have more market impact and hence cost more, and passive strategies are the opposite.

But, of course, it’s not that simple. According to BestX research, depending on the combination of volatility and liquidity regimes, choosing the right horse for the right course can result in drastic differences in performance.

FX Algo News - The role of pre-trade analysis in FX algo selection

Best execution is not simply about measuring transaction costs, and other relevant metrics, after a trade has been executed. Best execution is a process, whereby informed decisions are made throughout a trade’s lifecycle, pre- and post-trade, in order to achieve the best possible result for the client.

The modern foreign exchange market is a complex beast, providing participants with many different methods of execution. Within each execution method, there are a multitude of factors, and therefore additional decisions, to consider. For example, if you are employing a request for quote (RFQ), how many liquidity providers should you request quotes from and which ones? Or, if you are considering algorithmic execution, how do you select from the extensive range of products now available, and when a specific product is chosen, how should you select the parameters to use? In addition, do you want to access the market directly and have your liquidity provider place orders on your behalf, or do you want to simply execute with a counterparty as principal? If the former, are there specific venues you would like to access? The decision-making process can clearly become quite complex pretty quickly.

Independent TCA still a challenge in FX market

Implementation of FX transaction cost analysis (TCA) appears to have stalled, with the impracticality of conducting analysis across every available venue encouraging many parties to rely on venues or dealers to measure execution, despite concerns over transparency and impartiality.

During a presentation on FX market fragmentation at TradeTech FX 2019 in September, Andrew Hauser, executive director for markets at the Bank of England (BoE), spoke of the merits of responding to the challenge of greater fragmentation by seeking more effective, robust and independent aggregation, analytical and execution tools.

One of the observations he made was that TCA data sourced exclusively from one liquidity provider are unlikely to provide an objective evaluation.

Redefining FX Best Execution with Data Intelligence

Unlocking the insights from vast volumes of currency (FX) market data has long been the aim of skilled traders. Unlike equity market data, the over-the-counter (OTC) nature of FX trading means there is very little data standardization. With the new FX transaction cost analysis (TCA) tool built by BestX®, non-standardized data is normalized and presented back to traders in a way that is easily analyzed and acted upon.

Tomo Tokuyama, head of trading at First Quadrant, a large systematic alternatives manager in Los Angeles, California, has deep experience in currency markets, both on the sell side and the buy side, and has witnessed first-hand how technology has transformed FX trading. Lou Maiuri, State Street’s Chief Operating Officer, recently sat down with Tomo to discuss that evolution and how the BestX® TCA tool has taken execution to a new level with data intelligence that is helping traders better architect and deploy FX strategies in a more targeted and cost-efficient way.

Funds Europe Sibos preview: What’s happening at Sibos this year?

Experts from asset servicing, technology and post-trade services speak to Funds Europe about issues likely to emerge at the Sibos post-trade conference, held in London from 23-26 September. Among them Pete Eggleston, Director, BestX (State Street):

What is the asset management industry doing to fine-tune trading data and improve transaction cost analysis?

“The use of data to help improve the execution process within the FX market has increased significantly in recent years. There are multiple use cases, covering all aspects of the trade lifecycle from pre-trade, through the execution itself – in terms of helping traders make more informed decisions – and post-trade analysis. Decision-makers can be deluged with too much data, especially if it is not delivered in an easily digested and intuitive format. The topic is evolving rapidly, not simply around ‘big data’ but how to turn this into actionable ‘smart data’.

Key to helping the industry with this challenge is to deliver rigorous analytics, packaged and summarised in an intuitive, interactive and visual web-based user interface. The software is designed to allow a fund manager to codify their best execution policy, specifying the execution factors that are relevant for their business and execution style, together with user-defined, systematic outlier detection and monitoring. In State Street’s latest product upgrade, a new Peer Analysis module was included for the buy-side, which allows clients to opt in and share their performance data in an anonymous, community data pool, providing the basis for relative comparisons of performance against their peers.

The foreign exchange and fixed income best-execution analytics platform is used extensively by liquidity providers and effectively delivers a utility to the industry (i.e. a level playing field comprised of a common language of methodology and metrics). This provides the market with a standardised platform – a key challenge in any over-the-counter market – enabling meaningful and positive interactions between liquidity takers and providers.”

TCA data on FX algo performance winning over the buy-side

Transaction cost analysis (TCA) data on the performance of algorithms in foreign exchange (FX) is proving a hit with the buy-side.

Speaking at TradeTech FX Europe in Barcelona, a panel of FX market participants agreed that the use of algorithms will likely increase. However, uptake has been slow on the buy-side despite the market moving towards an equities style through more automation.

State Street Acquires BestX

State Street has acquired BestX, a software company that provides independent trade technology and TCA analytics.

The financial terms of the deal, which is expected to close in Q3 subject to closing conditions and regulatory approval, are not being disclosed. Following the deal, BestX will sit within State Street’s Global Link product suite, which is run by Martine Bond, executive vice president and head of trading and clearing for State Street Global Markets.

“Over the past few years, Mifid II, combined with broader economic and political stresses in the market and great competition in the FX market, has meant that our clients are looking for greater transparency and ways to improve their performance and their returns to client and shareholders,” says Bond. “So we started to look at strategic partners that could really help us achieve those goals for our clients and that’s why in January this year we partnered with BestX to offer TCA solutions. We had an overwhelmingly positive response from both the buy side and sell side and it became obvious to us that the BestX team were very strategic in the way that they thought and understood that this isn’t just about post-trade TCA, there’s so much more that we can offer clients. So I think that this acquisition is really the formalisation of that partnership, which we want to take to the next stage and I think that our clients are going to be delighted with the direction that we’re taking.”

FX: Pros look at best uses of rules-based order routing

Rules-based order routing (RBOR) has become a useful tool for achieving increased trading efficiency, although it does not automatically guarantee best execution.

Thomson Reuters announced earlier this month it had introduced RBOR to its REDI execution management system, enabling traders to set rules that determine which trades should be handled automatically rather than through manual intervention.

Capital Markets Startup of the Year — BestX

Financial News last night hosted its 16th annual Trading & Technology Awards Europe at the V&A Museum in London. The awards celebrate the success stories of trading and technology firms operating in, and supporting, financial markets over the past year.

BestX emerged victorious against a strong list of nominees to secure the prestigious Capital Markets Startup of the Year award.

BestX Partners with FastMatch for FX Tape Market Data Service

One of the leading FX transaction cost analysis solutions in the industry, BestX, has announced that the company entered into a partnership deal with Fastmatch. Last year the electronic communications network (ECN) launched a new service called FX Tape.

Fastmatch launched the FX Tape service as a central reference point which market participants can use to evaluate best execution practices. Since the establishment of BestX, the company has been focused on becoming the industry standard product to evaluate FX TCA, delivering services to asset managers, hedge funds, banks, and non-bank Liquidity providers.

Societe Generale turns to BestX for clients to measure best execution

Societe Generale Corporate & Investment Banking (SG CIB) today announced a partnership with the fintech company BestX, independent transaction cost analysis (TCA) provider for algo-FX spot execution.

SG CIB has developed its own FX algorithmic execution tools, allowing clients to trade directly in the market in a controlled way. The partnership with BestX enables clients to assess the costs and execution performance of their FX transactions through an analytical framework. In addition, clients can benefit from access to a unique set of analytics, which will measure many aspects of execution performance, including spread & impact costs and signalling risk.

Trade Analytics Software Suite BestX Adds New ‘Trend Analysis’ Module

In a post-MiFID II implementation environment, trading costs are taking center stage for the institutional market. Transaction Cost Analysis (TCA) has become one of the pillars of the new regulatory framework aiming to focus on providing the buy-side of the market with more information about the Execution of their orders.

One of the leading companies in the industry that specializes in TCA and best execution, BestX, has been providing software suites for pre-trade and post-trade Analytics . Today the company is unveiling a new module to its offering, focusing on analyzing trends in the execution of orders.