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BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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June 2, 2009

Two Birds, One Stone

By James Ramage

Cross-asset algorithms are a logical extension of where algo technology and the industry are headed, according to Sang Lee, a managing partner at Aite Group whose research focuses on electronic trading across asset classes and market structure issues. But their adoption rate so far is relatively low compared with algos used for equities.

Pankil Patel, Credit Suisse

The sellside needs to educate their clients more on how to use these algos, he added.

"There's still a lot of education going on from the brokers' perspective," Lee said.

Some buyside traders who don't use cross-asset algorithms said they still find

the concept a positive development. One hedge fund trader who requested anonymity said he trades stocks and options together using DMA.

He said he's intrigued by the possibility of using an algorithm to trade them simultaneously.

"But you have to make some quantitative assumptions along the way," the hedge fund trader said. "That's the trick. I'd be asking [brokers] questions about who makes the assumptions on the value of the options and how that works."

"They're Phenomenal"

New Jersey-based hedge fund Fairfield Advisors has used cross-asset algorithms since they first hit the Street. Fairfield trades in equities, commodities, commodity options and equities options, said Jeff Benton, who co-manages it. And the hedge fund sometimes uses Credit Suisse's cross-asset algos to establish positions according to its multiple-asset models.

"The fact that you can now go to options and stocks simultaneously is very helpful," he said. "[The cross-asset algorithms] are a phenomenal technology."

Why? For starters, they can mitigate risk. When a trade involves multiple legs and multiple platforms, the risk of slippage certainly increases dramatically, Benton said. But being able to execute two asset classes simultaneously removes that execution risk from the trade, he added.

"You might have a limit where you need everything to happen to get the return you're looking for," Benton said. "Obviously, being able to lock in the trade-knowing that you can get all of the various legs of the trade done at once-makes your life significantly simpler."

Get the Full Picture

Cross-asset algos are frequently used for hedging and unwinding. But they're also used in pairs strategies or to help traders acquire or sell off positions that a trader believes are positively correlated, according to UBS's Self.

And the algos ultimately help the buyside save money, added TABB's Nybo.

"[Buyside] commission costs go down," Nybo said.

"Their activities become more efficient. Their risk management processes are more effective. Their exposures can be managed at a much more granular level, in a more real-time fashion. You can buy a block of stock and try to hedge it in the options market, or in the futures market, and if the market moves, you have missed opportunity and additional costs if you can't get it off at the right price," he said.