The $5.4 trillion currency market is going electronic – and Pragma is getting in the game now with its own algorithms targeting the $2 trillion spot market.
Thats a lot of electronic trades.
Pragmas algorithms are targeting traditional buysiders, banks, hedge funds, regional banks and their brokers – all of whom are increasingly trading in the foreign exchange markets to either generate alpha, hedge corporate exposure or fund equity/debt positions.
Heads of equity trading desks are now being pushed to look at other asset classes – namely forex, began Curtis Pfeiffer, Pragmas director of sales. We can take what weve learned about trading in the fragmented equity market and apply it in FX, which is a market place that is also highly fragmented.
Pfeiffer explained to Traders that Pragma, a service bureau provider that never acts as an FX executing broker, has spent the last three years developing electronic trading solutions for non-equity asset classes, including futures, Delta One and spot FX. Pragma, he added, has chosen the spot FX market and currency pairs as its target area and released its algorithms less than a year ago.
Acting as an independent service bureau provider, Pragma will start out with a variety of algorithms specifically for FX. They range from a simple systemic time-weighted average price strategy, to a price-arrival strategy that is benchmarked to a type of implementation shortfall, to a third-generation liquidity seeker that minimizes market impact.
Danielle Caravetta, director of institutional sales at Pragma and a Credit Suisse alum, explained to Traders that while some FX algos bear a resemblance to those in equities (think TWAP), there is no true measure of volume in the currency marts.
The market trades over-the-counter style, via inter-dealer intermediaries, between banks or via FX prime brokers – thus there is no consolidated tape or TRF where volume is actually reported, she said. Thus, VWAP is more difficult to measure or create. Thats the difficulty. But, these three strategies are very similar to the way our algos work in equities despite the different market structures.
The difference, she and Pfeiffer added, was in the way the algorithms are routed to the venues where the trades are executed. First, given the fact FX is an OTC market, there is no NBBO like in equities and quoted bids and offers can be vastly different among quoting parties. Second, the currency markets are extremely private and proprietary, not all can trade in them and access is limited. Lastly, order types are much more limited in FX than in equities, which makes it more straightforward to trade.
What makes our FX algos different than, say, those from banks such as Credit Suisse, JPMorgan or BNP Paribas is that our algos dont internalize order flow or access only a few ECNs, Caravetta said. You get access to wherever best execution is – there is no preferencing of an order.
Pragma, she added, acts as a service technology provider to help clients set up a custom liquidity cloud and access multiple banks and the major eight to 10 FX ECNs: The client gets a much more relevant subset of liquidity than through a single broker-sponsored algo.
Pragmas algos are part of its flagship 360 FX platform, which includes not only algorithms but smart order-routing technology, real-time trade monitoring tools and trade cost analysis. According to Pfeiffer, FX traders, like their equity counterparts, are demanding an ever-increasing amount of transparency regarding where their orders are being routing. Pragma has no preference in where an FX order goes.
We dont go out into street as executing broker; rather were a trading technology vendor, Caravetta said. Clients will not interact with other FX prime brokers, rather they trade on the credit of their prime borkers and on the ECNs.