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John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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May 1, 2013

Forex Trading Getting 'Equitized'

How Forex Trading Is Going Electronic

By Gregg Wirth

Also in this article

Foreign exchange and equities are two distinct asset classes, each with their own set of trading procedures, customer demands and levels of execution.

But that is not stopping trading desks at the nation's largest asset management firms from nudging the two closer together. Often at the behest of clients, asset managers are coming to the realization that trading in these seemingly disparate types of financial instruments needs to be at least synchronized, if not also overseen by the same trading desk.

"It's really a radical transformation of FX as an asset class," said Will Geyer, head of order and execution management systems at ITG, an agency-only broker. "It's a natural trend and points to the sophistication of the FX process and the desire to bring the thought leadership in equities to the growing FX operations."

Mark Kuzminskas, Robeco

The reasoning behind this push, several trading firm executives told Traders, is to better harmonize equities and FX trading. Working the two in concert offers the best of equities trading-transparency, low-cost and rapid-fire electronic execution-in the firm's currency trading operations.

In effect, asset managers are starting to "equitize" the FX side of the trading ledger. This means creating an FX trading operation that comes to mimic equities trading with competing electronic trading platforms that offer low transaction costs, high speed and greater transparency.

In practice, algorithms designed for currency trades can scan for the best price and execute instantaneously in quantities determined by a trade schedule. The algorithms bring the promise of lower costs and efficiency to the end user, Geyer noted.

This is already true in FX trades done in tandem with equity side transactions that involve foreign securities, according to Mark Kuzminskas, director of trading at Robeco Investment Management. For example, if you have a customer trading in Japanese securities, chances are they're going to be sitting with a serious position in yen, to back up that trading. Those buyside firms want to manage that exposure on the FX side, and lock in profits on a trade at the best possible exchange rate. "Lots of investors are playing with the FX part of the trade that way," he said.

The move is also an overt attempt, the executives added, to bring the best practices of equity trading-such as algorithmic trading, superior order flow and execution via ECNs, as well as a focus on transaction-cost analysis-to the FX side of the business.

In the most concrete examples, some of the largest investment managers have made their heads of regional equity desks take on the additional role of heading the firms' FX desks. Vanguard Group, the largest mutual fund firm, has had its equities trading desk chief handling FX desk duties for the past few years, said Vanguard spokesman David Hoffman.