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November 1, 2013

Enter the Algo Upstart

Pragma Securities is set to offer foreign exchange algorithms and challenge the biggest brokers' electronic trading tools

By

Mary Schroeder

Big brokers began offering foreign-exchange trading algorithms five years ago, and now all the major players have an offering. Now a vendor is hoping to upend the status quo with a suite of algorithms it claims will offer better execution.

"We are an independent provider of trading technology, and there's a greater awareness these days in the FX market about existing algo providers who are generally dealer banks with a principal interest," said David Mechner, chief executive at Pragma, historically a vendor of equities algorithms. "Their P&L is in direct conflict with that of the client."

David Mechner, Pragma

Mechner argues that banks may favor their own liquidity pools when handling customer orders and that may work to the disadvantage of the customer. "It's an obvious conflict of interest," he said. "A lot of the algo offerings the banks provide explicitly trade into their own stream. Some of them are mixed where they may or may not. Some will mainly trade on ECNs, but there's a clear awareness that there's a role that an independent firm can fill there."

[See Traders Magazine Forex Coverage]

Foreign-exchange algorithms, like their cousins in the equity market, break up a large block trade and feed it piecemeal into the marketplace over time. In the FX world, the algos succeed point-and-click aggregation technology that simply gives the buyside access to a big pool of liquidity that might include ECNs as well as dealers. They are point-and-click mechanisms much like the old direct-market-access platforms of the traditional equities world.

Pragma is offering algorithms and not aggregation technology. It is pursuing hedge funds and commodity trading advisors as customers. Mechner contends this group trades more FX than traditional buysiders, who largely leave the trading to their custodians. A formal product launch is slated for the first quarter of next year.

GREATER ALGO EFFICIENCY

An early customer is Baltimore-based Campbell & Co., a systematic investment manager offering a wide range of strategies to clients. Roughly one-third of the firm's $3.2 billion in assets under management get invested in G10 and some emerging markets currencies. About 90 percent or more of the firm's FX trading is done electronically, said John Radle, Campbell's global head of trading.

The firm was one of the early adopters of broker-supplied FX algos, and uses them to trade large orders to reduce market impact and because it makes the trading desk more efficient, Radle said.

Campbell's pursuit of best execution led it to tap Pragma to develop an FX algo solution. Pragma is creating a liquidity pool comprised of connections to about 10 banks and five ECNs that Campbell has selected. With its expertise in developing algos, the firm is also creating algos for Campbell designed to achieve the CTA's benchmarks, Radle said.