With simplification of choice in mind, BNP Paribas’ Cortex iX FX algorithmic execution product is the “third generation” of algo system, says its creator, Asif Razaq, the bank’s Global Head of FX Algo Execution. It was launched two years ago with a choice of just two algorithms: Chameleon and Viper. Chameleon has a more leisurely approach to the market whereas Viper is aimed at traders that need a quick and aggressive execution. A third offering, Iguana, has since been introduced for those wanting to trade over a particular time frame.
In building Chameleon, Razaq has created a product that best suits clients that have time to work their order into the market, and which goes a long way to avoid detection. “No two Chameleon executions are the same,” he states. “As a random function of what the market is doing it becomes difficult for the high frequency traders to detect a pattern.”
Chameleon starts with the client’s strategy and proceeds by analysing multiple sources of market data which it uses to re-calibrate its execution strategy in real-time. The algorithm effectively dictates how each order will be executed so that when the markets move, Chameleon moves accordingly, speeding up or slowing down but always remaining in line with strategy. For traders that feel the market has reached a point where it will favour them if they move quickly, a ‘Rapid Fill’ button can temporarily put the algorithm into the more aggressive ‘Viper’ mode, to be switched off when the client chooses.
Indeed, Viper shares many of Chameleon’s functions but is geared to operate in a very tight time schedule (seconds as opposed to minutes). The third algorithm, Iguana, takes the flexibility of Chameleon but additionally allows clients to set a specific time-frame instead of letting the system dictate. “Our initial thought was to make this function an addition to Chameleon but the two algos serve two different needs,” explains Razaq. “We want to make it easier for our clients to understand by making our algos less parameter-heavy.”
Rather than feeding orders into a ‘black box’ and waiting, Razaq says clients are able to control the execution strategies themselves. “We wanted to create a simple interface and also have a feedback loop where information is delivered while the algo is trading; if it sees something happening in the market it will relay that back to the client so they can change, slow down, speed up, pause or even end the execution.”
Bearing in mind that this form of trading is for large values only, in practice, the client will issue instructions to purchase a specific currency, driving the algorithm to slice up that deal, minimising market impact by reaching out across every venue. It will then aim for the best spread at the time. The caveat remains that whilst the system is executing, the user is taking on market risk. But, says Razaq, if the algorithm is good enough to capture a significant price improvement over the risk transfer price (the price attained via voice trading or normal electronic trading) then the user will gain overall on a major single trade.
A post-trade report is generated for the client, giving a real-time view of how the algo performed against various market scenarios. With a detailed breakdown of every execution and trade ticket, the system also provides an auditable record of all trading, especially useful for evidence of compliance with corporate ‘best execution’ policy.
“We estimate that about 20% of the FX market is now trading via algo products,” says Razaq. “It is a growing space and the biggest growing client sector for adopting this technology is the corporate sector; they are looking for alternate ways to hedge and execute and there are now palatable products that they can use.” Typically corporates will be using an algo for an M&A deal or a dividend payment or anything of significant size. BNP Paribas’ offerings purposefully allow client anonymity (even within the bank) by trading only under the bank’s name. This is important, explains Razaq, because a major corporate suddenly making a large volume of currency transactions could alert the market to an activity (such as an M&A deal) which it may wish to temporarily keep under wraps.
However, he acknowledges that smaller deals, certainly less than a couple of million dollars, will see very little benefit from the algo trade execution process. “Algos only really thrive with large orders; with voice or electronic platform trades the spreads on small orders will be so tight there is no need for the corporates to take on extra market risk. Where you have a large trade or a difficult currency pair, algos are a perfect choice.”