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Algorithmic Trading and TCA Adoption Driven by FX Global Code
Traders Magazine Online News, May 14, 2018
Over the past 12 months, participants in the wholesale foreign exchange (FX) market have welcomed the launch of the FX Global Code, and its set of six over-arching principles that promote the integrity and effective functioning of the market. What makes the Code unique is that it encourages FX market participants to publicly acknowledge their adoption of the Code. Indeed, since it was released in May 2017, over 100 institutions have joined Pragma and committed publicly to it.
Alongside banks, brokers and technology vendors, a number of buy-side and non-financial institutions have signaled their commitment. Adoption amongst the latter group, which includes corporates and treasury departments, is significant for a number of reasons.
Firstly, non-financial institutions are active and sizable market participants, trading approximately USD127 trillion a year[1].
Secondly, when the Bank for International Settlements (BIS) established the Foreign Exchange Working Group to begin writing the Code in July of 2015, the Code was primarily directed at those firms providing trading services to asset owners, like corporations. A corporate treasurer that commits to the Code sends a public message to its service providers – banks, brokers and vendors – of the behavior it expects from them – creating a positive ripple effect across the market. This opens and encourages new ways of doing business, and, in particular, advocates for greater use of algorithmic trading and TCA.
Trading electronically in FX has been commonplace for years through Request-For-Quote (RFQ) or click trading. However, the increasing fragmentation of liquidity, accelerating speed of ECN matching engines and market participants, coupled with the proliferation of new trading tools, has created a whole host of fresh challenges and opportunities for corporate treasury departments.
One of the Code’s six principles is Execution, which provides a set of principles clarifying what traders should expect from their service providers. It also outlines the processes and policies they should have internally around trading in order to promote fair and orderly markets.
Algorithms set the benchmark for best execution
Corporates signing up to the Code will rightly expect their banks and brokers to demonstrate compliance with these principles as well as to continue to provide trading tools, like algorithms, that support adherence to the Code. While early execution algorithms were limited to automating relatively straight-forward trading instructions and traded on one venue, the technology and logic underpinning algorithms has advanced significantly over the past decade as the FX market has evolved.
Today the speed of trading, coupled with the number of venues and increasing variety of order types, make it impossible for a human trader to replicate algorithmic behaviour on one order, let alone if the trader has multiple orders to trade simultaneously.
A high performing execution algorithm will assess the current market situation, the available sources of liquidity at a given point in time and execution strategies available. After analysing this information, it will select the optimal routing decision and execute a trade in the most efficient manner while minimising market risk – all without the involvement of a human.
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