With the growth of electronic trading in FX markets, Asia Pacific has become one of the fastest growing regions for currency trading.
As regulators around the globe focus on best execution, buy-side firms in Asia are increasingly taking control of their orders and interacting with liquidity providers through execution management systems. The FX component of FlexTrade’s multi-asset trading platform provides institutions with access to 75 banks, ECNs and exchanges for trading spot, forwards, NDFs and swaps via a request for quote or request for stream method.
Through such innovations as FX workflow management – netting, splitting, bunching tickets, pre/post-trade allocations, PM/Fund allocations and advanced features such as FX-basket trading, FlexTrade has become one of the innovators in FX trading capabilities in Asia Pacific.
Vinay Trivedi, Senior Vice President, Strategic Initiatives & Head of FX Sales, APAC at FlexTrade Systems, discusses trends in FX markets and trading technology, specifically how the buy side is using aggregation tools and algorithmic trading through the execution management system (EMS) to seek the best price in Asian currency markets.
Based in Singapore, Trivedi joined FlexTrade in 2014, having previously worked in institutional sales with Integral Development Corp. for about three years. Prior to that, Trivedi was an FX options trader for five years. He began his career at the Bank of Bahrain & Kuwait in India as an FX/interest rate trader in Treasuries, and then moved to Reliance Industries Limited, where he was part of a four-person team running a multi-billion dollar FX options hedge book for crude oil imports/exports.
Q: What trends in FX trading technology, such as liquidity aggregation, are you seeing in Asia?
TrIvedi: In terms of FX, the hedge fund space has mainly been interested in aggregation. Traditionally, it was to trade with single bank portals or voice. Now, desktop real estate is a big problem for the traders. They just want to aggregate the liquidity into one box, and prefer to use one of two aggregators with a single back portal as a back- up option. Or, they may still want to go to voice just to gather some market information or clear some big size orders.
By using FX aggregators, they don’t have to eyeball which broker/liquidity provider has the best price to offer. This is how FX is different from equities or futures, and where market data and trading is exchange-driven and quite centralized.
With FX, the OTC brokers/liquidity providers create their own price. Sometimes these providers have some access to clearing, so they will skew the price, which could be captured by aggregation logic and cause the bank’s price to go to the top of the book. By skew we mean Bank A could show a much better bid than the rest of the market while Bank B could show a much better offer than the rest of the market. So aggregation will take the bid of Bank A and the offer of Bank B to create a top-of-book price. This is a favorable scenario for hedge-funds as they automatically get the best price in the market.
Q: What sorts of challenges have hedge funds faced?
Trivedi: The main challenges hedge funds face are the quality of liquidity and workflow management. Liquidity challenges can be resolved by standard aggregators but challenges of workflow management still persists as standard aggregators don’t concern themselves with workflow issues. Typically a hedge fund would have to allocate a trade across multiple portfolio managers, or trade on multiple prime brokers, or if they must, trade on behalf of multiple funds.
FlexTrade stands out in this regard as we not only help with standard aggregation for smart execution, but also automate most of the hedge fund workflows.
Q: Is algorithmic trading taking off in Asian currency markets?
Trivedi: Algos were very popular in equities and futures. Now the trend is also catching up in FX.
With FlexTrade’s EMS, we provide customized in-house FX algos as well as broker-sponsored ones. It’s a trend that is catching on a lot and we have few hedge funds clients using either of the two or both.
Q: What are the advantages of using a third-party algorithm from a tech provider vs. a broker-sponsored algorithm?
Trivedi: Well, let’s consider an example. A particular fund might have a $100 million order to clear in the market. They have the option to either work the order manually or work it using an algo.
If they choose the latter, we provide them with algos such as Time Slicing (aka TWAP), Trigger Time Slice, VWAP, etc. The idea is they can slice and dice the order in small sizes, and send it to market at regular intervals to get better execution with much less information leakage and market impact. And because they are using FlexTrade’s in-house algos, they can tap into our aggregated liquidity pool, which means they can trade on BBO (Best Bid-Offer) basis as against surrendering the order to one particular broker/liquidity provider.
In the case of brokers, they do provide algo access, but often charge a commission for algo use, which can range from $10 per million to $30 per million. The upside is the broker can match these orders to their own franchise orders, or put them into other primary markets, such as Reuters D2, EBS Markets, or dark pools. In such a case funds don’t have to cross spread and can reduce their transaction cost. However, the tradeoff is the client has to pay a commission on such transaction and also miss out on the benefits of aggregated liquidity.
Both methods have merits.
Q: Are these algos used for the liquid currencies in the spot market or are they used for options as well?
Trivedi: At the moment, FX algos have yet to reach the level to where they can be widely used across the asset types. For instance, in the spot market, some brokers are only offering algorithms on liquid currency pairs, such as G10 and on certain liquid EMs [emerging markets] such as USD/SGD and USD/THB. No brokers are offering algos on NDFs at the moment, although there is a demand for it.
It is an evolving process that is guided by client demand. Spot algos are currently in place with EM and NDFs next. Options are a step farther down the road.
Of course, FlexTrade’s in-house algos can help because we don’t really differentiate between the two currencies. For us, spot, forwards and NDFs are pretty much the same because the technology behind the products is the same. So our algos can actually work on all the asset classes, which could be streaming spot, outright forwards or NDFs.
Q: In terms of geography, where is FlexTrade seeing the most demand for your products within Asia Pacific?
Trivedi: If we include Australia, the four primary centers of demand are Tokyo, Hong Kong, Singapore and Sydney. We have also started seeing demand from regional centers such as Taiwan, Korea, Malaysia and Indonesia.
Countries such as Indonesia, Malaysia and the Philippines are at a stage where a transition is happening. While there is some apprehension, they are now realizing that the use of technology can make their trading more efficient.
Q: What is the sell-side’s perspective on FX trading technology and connectivity to venues?
Trivedi: The sell side is primarily interested in white label technology that allows them to distribute their prices to as many venues as possible. For example, they may want to distribute their prices to a variety of third-party FX platforms, or provide a branded platform to their customers, or use the API route to reach as many channels as possible.
Some Tier 1 level banks have managed to build their technology in-house, but many others are lagging behind. To compete Tier 2 global banks and regional banks are now looking to third-party vendors such as FlexTrade to fill the gap in their e-FX offering.
Most Tier 1 sell-side banks use in-house technology for price discovery from a variety of sources, which could be primary markets, voice brokers, ECNs and direct connections. They have also invested in technology to build price and distribution engines to reach clients via their single bank portal or APIs. These APIs can push prices to any platform a client is using to trade.
Q: Are traditional asset managers changing their behavior rather than relying on their custodians?
Trivedi: The short answer is Yes.
Traditionally, when the buy side traded cross border equities, they completely relied on their custodian to price for FX exposure hedging. That model is definitely hassle-free for asset managers, but it’s also the costliest model because you may not be getting the best execution in the market.
Alternatively, the buy side can do an RFQ to a few brokers to get the rate for block trades and trade on a best LP basis. This method is getting more popular, especially due to the increased compliance requirements of best exection.
The third way, which is also growing in popularity, is utilizing a third party vendor such as FlexTrade to access liquidity, manage their exposure and achieve best execution.
Q: What sort of customization and workflow management has FlexTrade delivered to its buy-side clients?
Trivedi: FlexTrade is currently working with several asset managers to automate their workflow. For example, if an asset manager has a sizeable portfolio in equities and futures, we can help them automatically capture the value of the currency overlay exposure and hit the market to hedge immediately.
We have also done several workflow-related customization projects, such as netting (base/term/cross CRY), splitting (spot and forwards) and bunching FX orders to reduce the number of orders to market, which in-turn dramatically reduces the transaction cost.
Lastly, we have developed a smart post-trade allocation tool – FlexMOS — which is designed for both the buy side and sell side. FlexMOS can be used by the buy side to interact with their sell-side brokers, electronically negotiate forward points to a roll position, and book FX forward hedge trades as per matching the underlying FX exposure.
Q: What regulations in Asia are the buy side and sell side focusing on? Is there anything currently that requires them to look at best execution?
Trivedi: From an FX perspective, there is no direct pressure from local regulators in Asia to provide best execution. However, what is happening in the West — especially with MIFID II – has become a wake-up call for asset managers in Asia. With its focus on trading transparency Asia-based asset managers are starting to show increased interest in transaction cost analysis technology.
From a sell-side perspective, this has resulted into some changes on how they interact with the buy side and charge for their services.