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July 2, 2013

Taking Control of the Process

Buyside Growing Comfortable with Electronic Trading

By Gregg Wirth

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Traditional asset managers are growing more comfortable with foreign-exchange trading, and while many are dealing directly over the phone with large banks to facilitate their FX trading, some are crafting their own FX trades on electronic platforms.

"There is more of a rush in the FX market for asset managers to gain control of the process of investing, and get a better handle on costs," said Matthew Sherman, senior trader at the Ohio Public Employees Retirement System. OPERS held assets of $80.3 billion, as of Dec. 31, 2012, and is the largest public pension fund in Ohio.

Michael O'Brien, Eaton Vance

The asset management community has several reasons for tapping into the FX market, though the main one given by several firms that talked to Traders Magazine was to fund the purchasing of foreign securities. (Most do this by executing a spot trade, swapping U.S. dollars for the foreign currency needed to purchase the securities.) Another reason is to hedge a long equity position in a foreign stock by using a forward contract to secure a favorable future conversion rate in the foreign currency. Increasingly, however, some fund managers are even becoming emboldened enough to make separate FX trades-unrelated to foreign equity trades-for dedicated currency or emerging market funds.

Similar to the overall FX market, spots and forward contracts are two of the most popular FX tools asset managers are using in their trades. Chiefly, asset managers are using spot trades-a trade of one currency for another at a set rate-as financing or to take advantage of favorable currency rates, and using forward contracts to hedge, especially in connection with a foreign equity purchase.

OPERS's Sherman said he trades FX primarily as funding for the pension group's international securities sales or purchases, and this comes from across all client accounts. However, he also makes stand-alone FX trades for the group's midsize emerging markets funds. His desk mainly does FX spot trades, swapping U.S. dollars for emerging currencies, and when it hedges on an equity trade, it uses forward contracts, Sherman said.

OPERS uses FX Connect for its FX trading activity, Sherman said. FX Connect is the FX multibank platform for institutional investors, created by a unit of State Street Global Markets, the brokerage division of State Street.

"We want to do whatever we can do to manage things ourselves instead of having a custodian or broker/dealer do it," Sherman said of OPERS's online FX dealings. Indeed, for the first time, OPERS used algorithmic trading in the FX market this year. "Algos allowed us to look for other liquidity, not tip our position and manage our risk," he explained.