December 2017

Expert Practitioners Discuss Algorithmic FX Trading

Mark Burroughs, Director of eFX Distribution at RBC Capital Markets, spoke to eForex on algorithmic FX trading. Anna Reitman of eForex conducted the interview and the following is an excerpt from the article featuring Burroughs and some of his industry peers.

Old Drivers, New Technologies

Using strategies that aim to minimise market impact and reduce execution costs have historically been the primary motivators for using algos and it’s evident that the appropriate strategies used in the right conditions can achieve those aims, said Mark Burroughs, Director of eFX Distribution at RBC Capital Markets.

More recently, market structural changes and regulatory obligations drive adoption of algos as clients seek alternative liquidity sources or look for more execution transparency.

Clients demanded a “simple suite of algo strategies with bespoke controls”, which give them a substantial degree of discretion throughout the order lifecycle.

“They want to retain the ability to impact the pace and participation rates of the strategy real-time, allowing them to be re-active as conditions change,” he said. “Ultimately, we aim to deliver a suite of strategies that allow clients to execute their trading strategies optimally, according to prevailing market conditions and within any parameters they have set for themselves.”

“Clients are also experimenting more, and RBC is helping them understand the benefits of implementation shortfall strategies (sourcing liquidity attempting to beat arrival price) versus passive strategies (which can lead to the assumption of excessive market risk),” said Burroughs.

 “What has become clear though is the shift away from vanilla strategies as more and more investors continue exploring a broad spectrum of execution algos.” a blanket adoption of algos by any means, but we are making clients more aware of the execution solutions available and helping them understand the potential benefits of deployment,” he added.

Real-Time Alpha

At RBC, the bank continues to work with clients to understand how algo tools can be leveraged to meet individual objectives. In the short term, the FX algo business does not need to change drastically, said Burroughs, and developments are more focused on pre- and post-trade analysis, in particular delivering detailed transparent TCA to meet clients’ regulatory obligations.

“Our current algo offering is achieving these aims effectively and we are pleased with the performance of our algo strategies in the current environment. However, this is a dynamic trading environment and as structural changes evolve we are very well aware that our strategies must evolve as well,” Burroughs said.

“You have to find the right balance of analytic tools to present to clients. Some clients require more than others but it is feasible that the pending MiFID II obligations will spur investors to adopt a more consistent approach to TCA data consumption and analytics.”

RBC encourages real-time management which allows clients to stay fully engaged with their algo strategy. The RBC strategies have in-trade controls allowing the user to be reactive to prevailing conditions and maintain order participation within their risk boundaries and meet their objectives.

Clever Routing

Smart order routing (SOR) functionality has always been part of RBC’s algorithmic offering and more clients trade direct to market strategies via the SOR as opposed to principal algos. Regulatory obligations for transparency and best execution are likely to be the drivers for that trend.

Indeed, these factors helped shape RBC’s SOR strategies, said Burroughs, certainly with the Strike and SmartTake Algo offerings. Both these algos intelligently source liquidity across the market spectrum, targeting active venues with a blend of passive and aggressive orders attempting to reduce implementation shortfall.

“Conversely, at RBC, we’re developing our SOR capability to handle large block trading capabilities where franchise order flow fills block interest without accessing the market. Pre- and post-trade analytics continue to be a client benefit with increasing demands for bespoke services, and pretrade analysis increasingly so, as clients “prefer individual strategy analysis, liquidity profiling and recycling times”, he said: “It’s evident that more clients are taking the time to consider risk versus reward, pre-trade.”

Regulatory Impacts On Fx Markets

Whether regulations will boost FX algo usage or not remains in question. While MiFID II is the regulation most frequently discussed with the most far-reaching implications, other transparency initiatives are starting to get noticed and weighed up for potential market impacts.

Regulatory directives from MiFID II and the burgeoning industry adoption of the FX Global Code of Conduct principals should give customers more confidence to expect more from their banks, and collaborate with them to find optimal solutions for execution, said RBC’s Burroughs. RBC was a member of the Global Code FX Working Group. The bank led the drafting of two sections of the Code and contributed to many others. “We expect the Code to help shape the market of the future and by promoting the use of best practices, we should help raise industry standards collectively. We give it our full support and have already signed a statement of intent,” RBC’s Burroughs said.

On MiFID II, he noted that the sweeping EU regulation will demand a more transparent and auditable execution process, and that it is possible that transparency obligations may force more investors to trade more DMA and less principal strategies as they strive to demonstrate best execution across the market spectrum. “We are increasingly seeing investor demand for third party TCA analysis to validate their execution strategies. This may incur additional expense but nothing prohibitive,” he said. “I certainly do not expect this to impact the growth trend in algo usage.”

RBC are working with a third party TCA provider to help prove best execution, but more generally are partnering where it makes sense to deliver solutions to clients.

Read the full report