With growth in electronic trading of foreign currencies taking off the use of algorithms is probably a logical development. The practice is still in its infancy, but at least one equities technology vendor sees promise. David Mechner, chief executive at Pragma, sat down with Traders Magazine and spoke about his firms new initiative aimed at hedge funds.
Traders: Algorithms for foreign exchange?
Mechner: Yes. Youve got hedge funds and CTAs (Commodity Trading Advisors) trading Fx as an asset class. Typically theyre more advanced. Some use algos that a lot of the big banks provide. But there is a wide range in the sophistication of tools.
Traders: Why did Pragma decide to enter the space?
Mechner: Before doing so we probably talked to about 30 to 40 different buyside firms. We are an independent provider of trading technology and theres a greater awareness these days in the Fx market about existing algo providers who are generally dealer banks with a principal interest.
Traders: And thats a problem?
Mechner: Their p&l is in direct conflict with that of the client. Its an obvious conflict of interest. A lot of the algo offerings that 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 theres a clear awareness that theres a role that an independent firm can fill there. Were aligned with the client in achieving best execution.
Traders: Are these algos in the way the equities traders think about them?
Mechner: I make a distinction between aggregators and algorithms. Aggregation just means you are giving the client access to a big pool of liquidity that would ideally include ECNs, as well as potentially other dealers because dealers in Fx still represent over 60 percent of turnover. So a lot is click-trading aggregation. Its like Lava in the old days of equities. Most of the offerings are fairly DMA-like.
Traders: You are offering something more sophisticated?
Mechner: With algos, the primary benefit is if you have a large order you are breaking it up into smaller pieces and stretching it out over time. You dont have to pay as big a price concession. If you want to trade a block, theyll make you pay up a bit. Also, you dont have to cross the spread. You can bid yourself and if youre a patient trader people might cross the spread and take your price.