Alpha - September 2007 - (Page 48)

FX Electronic Trading in the Foreign Exchange Market algorithm.” I’m not sure clients are going to buy that. SMART: I disagree. If I’m selling a client an algorithm, I’m not going to say that they’re getting a better execution than they would get through a trader. I’m going to say they’re getting a rules-based execution which works to certain parameters which I’ve agreed with the client upfront. What we are guaranteeing is that those parameters will be the ones which we use to execute. We will then report that fact back to the client, to show him that we did what we said we were going to do and to make clear their performance versus the market. DEVELAY: MiFID is going to accelerate the development of algorithmic trading. And not because algorithms are used in the equities, but because when you’re leaving an order to be executed by a trader, you will have the detailed execution levels for each piece of the trade. SMART: Bridges will be built between sell-side institutions to share liquidity at certain points within algorithms. It’s likely that it will just lead to increasing complexity in the market and slightly less transparency, although it probably goes hand-in-hand with a better execution… at least in theory. LOWRY: It may also lead to fewer liquidity providing players in the market. SMART: It will lead to fewer players in the market. You need to show that you have a reasonable market share to show that the client has a reasonable chance of benefiting algorithmically from you not just executing everything on the street. A client would like to believe that you’re keeping as much of their order in-house as you possibly can. The challenge for me as a sell-side organization is to prove to my client that I’m giving him something approaching the best liquidity. And I’m able to give him the best execution because I have access to a deep pool of liquidity. ROBSON: What has been interesting over the last 12 to 18 months is the question about what is driving growth. There have been questions about the extent to which high frequency algorithmic trading is driving it; how much of it is retail; or how much of it is cross-border asset investment. One of the key reasons for establishing FXMarketSpace was to provide for the algorithmic community, so you won’t be surprised to hear that I believe this has been the main reason for growth in the market and will continue to drive further growth as it matures. SMART: The market is primed for huge growth, but we should make a distinction between algorithmic trading and algorithmic execution. The former is using a computer to make a decision to, say, buy ten dollar yen. The latter is asking what is the best way to buy ten dollar yen. I see the second piece growing enormously. LOWRY: Everyone is trying to shoehorn the algorithmic functionality From left to right: Dan Conte, Bloomberg; and Mark Warms, FXall that exists in the equity market into the foreign exchange market. Will people actually use them? I don’t know. People are saying they want to try them but, at the end of the day, if a client wants to give a bank a big order to trade, they’re giving it to the bank because that bank has the skill to trade that order in the market. Whether or not that bank uses just a trader to do it or tries to replicate the trader by using algorithm to do it is part of the service the bank provides. WARMS: The trend we are seeing is for banks to provide algorithms directly to their clients rather than clients developing their own. Regardless of who developed it, algorithms are increasingly being employed to execute orders. What’s new is when a client chooses to access the algorithm supplied by a bank, typically there is a fee involved. If the bank manages this risk as traditional, there is no explicit fee. LOWRY: What you’re saying to a client is: “You can leave your large block order with me, and I’ll have a human trade it, but I’ll get you a better result if we let our super secret algorithmic trade it for you. Oh and by the way, I’ll charge you a fee for using my 6 • Alpha Sponsored Roundtable • September 2007 MODERATOR: Speed and best execution in liquidity used to be entries to market. What will the drivers be in the future? SMART: If you don’t have speed and the capability to manage risk, you’re not in the game at all. However, the key piece remains client service, because ultimately clients will pay you for value that you add to their business. DEVELAY: What clients are looking for is an electronic trading sys- tem that can easily be integrated within their internal system and that allows them to do as much things as possible. From the real money side we are working with ten, fifteen different banks. We need to have one access point to all those banks. This is why the multi-portal system is the only option for us. ALDRIDGE: The plan at the moment is to go after the Holy Grail, which is to continue to develop the product that tries to meet the needs of the very different participants in the FX marketplace. ●

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.