Treasury Today Country Profiles in association with Citi

Exotic algorithmic trading

Abstract technology background

As more treasurers begin to explore the virtues of algorithmic FX trading, this company has developed a solution that enables corporations to achieve better prices when dealing in exotic currency pairs.

The launch of Pragma’s FX algorithmic triangulation solution for cross pair FX trading marks another milestone in the development of the rapidly-expanding algorithmic FX trading industry.

And by allowing market participants to achieve better prices when trading illiquid currency pairs, Pragma hopes to extend the benefits of algorithmic trading to a broader range of traders for its bank clients.

Growing corporate usage

Within the corporate community specifically, the use of algorithmic trading has thus far been limited. Those who have dabbled with the technology have typically been large corporate names, conducting a lot of trading activity. British oil giant, Shell is perhaps the most famous name to advocate this form of FX trading.

However, as the overall volume of FX business done by leveraging algorithmic-based trading increases, corporates are showing greater interest in the technology. A recent report from Greenwich Associates highlighted this trend, finding that around 10% of corporates are currently using algorithmic trading, up from 7% in 2015.

What is most interesting is that this form of trading is no longer exclusive to larger corporations. The report indicates that a growing number of companies with a trading volume of less than US$1bn are beginning to use the technology.

Achieving more transparency and greater control of their order flow is key for these companies. Trading in this way can also boost the bottom line. “With the average corporation in our study trading US$20bn per year, each basis point of improvement in trading performance translates to an additional US$20m straight to the bottom line,” states the report.

Why should treasury consider algorithmic FX trading?

According to Pragma’s Pfeiffer, there are four key reasons for treasury to be interested in algorithmic trading:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block.

  • Algorithms can access multiple sources of liquidity which effectively narrows the spreads being traded on.

  • They provide liquidity as well as take prices, allowing patient traders to capture part of the bid-offer spread.

  • Automation frees traders to focus more of their time on those issues where human intelligence and judgement add the most value.

Widening the net

Widening the appeal of algorithmic trading was a key driver behind the launch of Pragma’s latest algorithmic trading solution. It does this by enabling traders to achieve better pricing when trading illiquidity currency pairs by using algorithmic triangulation.

This sees the trade between the illiquidity currency pairs split into two, with a third, more liquid currency, used as a base currency. Curtis Pfeiffer, Chief Business Officer at Pragma details what this looks like in action. “If a corporate treasury wanted to trade NZD/JPY, the solution would split the trade into NZD/USD and USD/JPY,” he says. “There is more liquidity for those pairs, thereby reducing market impact, and the algorithm can then “triangulate” or roll-up a price for the original order of NZD/JPY.”

Triangulation brings the benefits of algorithmic trading to a wider range of currencies, making it more useful for corporate treasury departments trading exotic currency pairs, adds Pfeiffer. It can also result in higher quality execution because of narrow spreads and greater liquidity.

An algorithmic future?

With more corporates seeking to achieve best execution in the FX market, Pfeiffer expects to see corporate demand for algorithmic trading solutions from banks to grow in the coming years.

“Demand is still largely driven by those corporates actively trading larger order flow, he says. “But word is spreading as the technology matures and becomes more accepted. Our bank clients are seeing a growing demand from corporates with smaller trading volumes seeking best execution. This should only increase in the coming years as more companies look to adhere to the FX Code of Conduct which has best execution as a core tenet.”

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