Building an FX Automation Roadmap: Top Tips from The Network

The level to which automated trading has been embraced by buy side FX desks is diverse to say the least. While some firms have detailed over twenty years of experience using algos and fully electronic trading, others are yet to test the waters and still rely on excel spreadsheets and voice trading to get their currency trades done. This gulf in experience and sophistication means that as automation has emerged as somewhat of a buzzword in the industry, the definition is in constant flux for trading desks and even different asset classes on those desks which adds additional complexity to those at the start of their journey.

What are the drivers?

Throughout 2020 a new sense of urgency and focus has emerged among Finance Hive members with little to no experience in the world of automated or algo FX trading. A more scientific and quantitative demonstration of best execution, removal of human error and operational risk, and an empowerment for traders to focus on more “value-add” tasks have long been cited as the benefits of higher levels of automation, but when unanticipated volatility coupled with an exodus from the office that it triggered has shone a new light on the extent to which these advantages need to be leveraged.

“We’ve been looking to further embrace electronic trading for a while now, but moving to a work from home environment has been a real trigger for us” says Jason Fromer, Head of US FICC trading at Manulife Asset Management. “Due to the circumstances it was more difficult for the sell side to make prices as they normally would and we found using algos to be more robust – probably about 70% of our business was going through algo or RFS during this time which is much more than usual.” As markets became more stable this balance shifted back for Jason but the firm’s willingness and appetite to embrace more electronic and automated trading.

Gary Pettigrew, Senior Derivatives Trader, PSP Investments agrees, “Looking at automation across the different asset classes we trade has definitely been bumped up the to do list since we’ve been working from home. Our time is precious now more than ever and we want to be adding the most value we can to get the price for our clients. It’s become clearer that spending time on small market trades is not the most optimal use of these resources so it would be helpful to have a machine take this off our hands”

“We’ve been looking to further embrace electronic trading for a while now, but moving to a work from home environment has been a real trigger for us”

Manulife Asset Management

We asked 80 head traders to what extent they were looking to increase the automation of their FX execution at their firm in the next 12 months:
Moderately37%
37%
Significantly36%
36%
Not much20%
20%
Not at all7%
7%

Q for FX Connect – Why do you think COVID has increased appetite for automation?

Times of great stress often introduce or accelerate change.  Automation in the world of institutional FX trading has been broadly discussed for several years but adoption across the market has been slow.  We saw clients adopting different elements of automation when time allowed but there was no strong driver to accelerate the efforts.

With the onset of COVID most people had a lot of additional responsibility and change fall onto their plate in both their professional and personal lives.  We saw clients take a step back and look at how best to effectively manage their time.  If a client could automate a portion of their trading, perhaps their smaller tickets, then they could free up time to spend on larger ticket orders or home schooling their child.  There are enough tools in place now to create a framework to manage and measure an automated trading process and COVID was simply the catalyst to move the market forward.  I’m not entirely sure that COVID has increased the “appetite” for automation as much as it has opened the eyes of some to how close they were to satisfying the hunger.

I’m not entirely sure that COVID has increased the “appetite” for automation as much as it has opened the eyes of some to how close they were to satisfying the hunger.

FX Connect

Digital Boardroom Takeaways

Since the end of April, The Finance Hive have hosted bi-weekly roundtable discussions for our members to come together and share their biggest challenges attendees are facing on their automation journey. Over this time we’ve been joined by over 100 head traders from financial centres across APAC, the US and Europe and together these senior executives have brainstormed on the solutions to the problems they’re facing. A selection of the advice and takeaways they have outlined are below:

  • Factoring transaction fees into rules-based trading to make decisions on routing is an area lots of people are concentrating on.
  • Rules can be incorporated into OMS or EMS and can be internally written or provided by platforms based on a firm’s objectives
  • Automation means a different thing for everyone – for some it’s about auto order generation, for some it’s about auto-routing, etc.
  • Automation in spot is far easier than forwards because you have more data.
  • It is important to define what automation means for your firm, so you have a clear idea of what you are trying to do
  • Embracing automation should empower traders to make their roles more “value-add” and form closer relationships with investment teams
  • Automation has an obvious role to play when looking to net trades more effectively. However, to maximise the benefits of this technology, it’s important to manage incoming orders and ensure that they are granular in their formulation.
  • One advantage of automation is that it leads to the removal of trader bias, in addition to reducing the opportunity for operational mistakes during the trade lifecycle
  • Take small steps – there is a logical order to your automation journey, and you should not try and do everything at once.
  • Take care surveying the vendor landscape – although there are many vendors touting automated trading solutions, firms need to ensure that they choose a technology partner that can offer flexible tools that match up to their particular workflow requirements.
  • Without lifecycle TCA to verify the price achieved versus expected price it is difficult to effectively monitor and refine auto-execution
  • Pre-trade analytics can play a big part in measuring expectations, and therefore the overall success, of automated trading.

FX Connect – What was the biggest takeaway from your roundtable and the number 1 tip you would give our members as they start their automation journey.

The biggest takeaway was that there was a wide array of definitions about “automation”.  Some viewed automation as completely headless execution where there was no human involvement while others saw it as the ability to streamline an existing process with continued human oversight.  The truth is that there is no one-size-fits-all solution, each client and potentially each trader will need to determine how define and design their automation solution.  Participants were happy to hear that FX Connect offers various levels of automation which provides flexibility in how new execution paths are adopted.

My #1 tip would be to initiate a discussion with your vendor(s).  We are in a unique position to have a broad view of market trends and how peers are using very specific pieces of functionality.  A client should be able to consult with their vendor(s) about best practices and work with them to design a game plan on how to achieve their individual objectives.  Innovation should be fuelled by client demands.  Start small and evolve to reach a level of automation which satisfies your needs.

A client should be able to consult with their vendor(s) about best practices and work with them to design a game plan on how to achieve their individual objectives

FX Connect

Taking the next steps

E-trading will be a big part of our business going forward” says Jason. “Once we are comfortable up and running with our algo trading we want to be able to look at making selection of the algos more systematic and start relinquishing the manual workload on smaller orders.”

The need to take small steps and logically progress through the stages of automated trading has been stressed frequently in our conversations with members. For some more ambitious managers, the end goal is “no-touch” fully automated trading where a rules-based system can execute their orders in the market with no human intervention. Even from some form of automated order generation and algo selection the race to this automation utopia is a marathon and not a sprint – buy side looking to increase the level of automation that they harness should seek out specific opportunities and look to incrementally solve execution and workflow challenges as they arise.

For example, a key focus for Jason right now is getting a single point to access the bank algo platforms. Fragmentation and manual data entry to access these platforms must be addressed before Manulife can pursue future endeavours. In the same vein, one of PSP Investments main focuses right now is on streamlining trades originating from their treasury.

“Currently there’s quite a lot of unnecessary complexities in the workflow right now.” Gary comments. “If we want to progress with automation, we need to streamline first. Everything has to be standardised and all the data we need has to be granular and readily accessible before we can even think about automating. We’re making a lot of progress here which is encouraging”

Once we are comfortable up and running with our algo trading we want to be able to look at making selection of the algos more systematic and start relinquishing the manual workload on smaller orders.

Manulife Asset Management

Q for FX Connect – How are you helping clients put together their automation roadmap? Are there any examples you can share?

As a technology vendor it’s our job to provide a set of value additive capabilities which clients can easily adopt.  A few years ago we did an analysis to look at the size of the orders which were going through our request for stream (RFS) channels and we observed that the average ticket was small when compared to the size of orders in other trade types.  Our conclusion was that the time spent on manual execution of these orders would likely be better spent on other tasks.  We spoke to clients and developed our automated order router (AOR) solution which provides several different flavors of automation ranging from bulk manual execution to completely headless trading.  Our main objective was to provide a flexible framework to meet the needs of clients across the sophistication horizon.

One of the common use cases we see leverages our rules to auto-route and execute smaller orders with a specific set of parameters such as certain currency pairs during liquid times will go out to a group of available counterparties and execute at the best available price once all quotes are received.  This provides a client the ability to achieve the same objective in an automated fashion as they would have in a manual execution process.  The end result is likely nearly identical but it’s achieved in less time.  Over the course of a day or week or month the time savings can be significant and when combined with a proper TCA process the results can be measured and the automation process can be tweaked when/if necessary thus creating a constant and consistent feedback loop.

We developed our automated order router (AOR) solution which provides several different flavors of automation ranging from bulk manual execution to completely headless trading.

FX Connect

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