Photo of Jonathon Traer-Clark and Aleksandra Siwinska from Hewlett-Packard accepting on behalf of Zac Nesper.

Hewlett-Packard (HP) has one of the largest foreign exchange exposures (outstanding contracts of about $35 billion as of October 2011) in the corporate sector. The size of this exposure can be a large portion of the average daily trading volume in some emerging markets. An appropriate execution strategy is therefore extremely important to ensure that HP maximises the value of its hedges. The company wished to develop a trading strategy to optimise trade execution, thus obtaining the best price and in some instances maintaining anonymity in the market.

At the outset, HP entered a prime brokerage relationship to gain access to broader and deeper liquidity. Prime brokerage also provided anonymity and the ability to trade smaller sizes using algorithmic trading. The approach allowed HP to ‘be the bid’ and let market liquidity come to the company itself rather than crossing the spread. This became particularly important when HP announced an $11 billion cross-border acquisition it needed to acquire currency to pay for.

Zac Nesper, Director of Foreign Exchange, HP, explains: “We set the algorithmic engine to accumulate several million GBP per minute first by being the bid, and then crossing the spread, if needed, to get these small amounts done. We also utilised limit orders of bigger size, so if someone else crossed the spread, we would absorb the liquidity without directly moving the market. This approach to execution allowed us to achieve better pricing without making the market aware that we were buying in size.”

This strategy was used to purchase billions of GBP in a short period of time without any market awareness that HP was ‘on the bid’. It has also been used to ensure HP minimises the price impact on other large trades it needs to make. HP’s project team then developed a currency specific trading methodology for emerging markets. Contracts were moved to more liquid value dates (eg BM&F futures in Brazil) which meant that the positions were less risky for the banks taking the other side of the exchange, allowing HP to secure pricing at lower spreads.

“We also developed a ‘pre-roll’ averaging methodology to split our exposure and trade in smaller amounts over a two week time period in order to take better advantage of market liquidity, opportunistically rolling contracts at lower forward points cost,” says Nesper. HP then started to trade non-deliverable forwards (NDFs) live during local market hours to take advantage of deeper liquidity across different tenors. This ensures that the company locates and takes advantage of bank axes and foreign exchange (FX) positioning to improve prices for HP.

By using the prime brokerage based tool, HP was able to purchase GBP to fund the $11 billion purchase of Autonomy without the market being aware. The company has also used this same strategy for other large trades. HP saved millions per quarter by adopting a pre-rolling strategy (prior to the company netting day) and trading emerging markets exposure competitively during local market hours – and in amounts that market liquidity could better absorb.

“Our risk management solution also unwound one of the largest merger and acquisition (M&A) option trades ever in a manner that provided price tension without letting banks know the size, direction, or timing of the trade in advance,” Nesper explains.

HP has developed a market leading framework on how FX hedges are executed and has been a market leader in adopting cutting edge technology and practice to improve its trade execution. This has already resulted in explicit savings of tens of millions with much of this having the potential to be recurring savings. In addition, the trading methodology has resulted in smoother price action in the market as there is less ‘big flow’ hitting the market at relatively illiquid times. It has also enabled HP to execute an enormous M&A flow anonymously.