Vanguard Set to Use FX Algos

Vanguard is cutting out the middleman.

The mega-asset manager, in a bit to cut fees and costs while improving their own executions, is set to use algorithms when executing foreign exchange trades. As first reported by Reuters, Vanguard is cutting out its bank intermediaries and keeping the cash it would normally spend paying commissions on these trades in-house.

The head of FX trading at U.S.-based Vanguard, which trades about $225 billion in currencies each month, told Reuters the fund giant was in talks with several forex platforms about launching specialist algorithms designed to seek out and trade with other asset managers.

The move to electronic trading, Reuters learned, would come later this year, Andy Maack, Vanguard’s FX trading head, said.

“It is going to reduce some dependency on the banks. It’s not going to replace the banks, but give real money managers new sources of liquidity,” Maack said in an interview.

By cutting out the bank intermediaries from some of its training, Vanguard can not only cut costs but also reduce slippage on trades and keep its own clients’ interests closer to the vest and prevent leakage. On the flip side, the banks stand to lose precious commission dollars they would earn on trades, custody and transfers. The biggest banks, which hold nearly half of worldwide forex trading, earned a combined $16.3 billion in revenue from FX trading in 2018, data from Coalition showed.

Algos can help Vanguard, as well as other mega asset managers, trim costs and improve execution, in the more opaque FX market. There are several FX algo providers at the ready to provide algos – which either through spray or serial routing strategies, can tap multiple liquidity pools simultaneously.

Reuters noted algorithms play a growing role in the forex spot market and that fund managers have doubled the share of their trading using algos over the past six years to 27%, citing Greenwich Associates data.