FX algos and auto-pricing on the rise as traders look to minimise market impact, says Bloomberg FXGO head

Bloomberg’s Tod Van Name said algos, automation for NDFs and options pricing and trading grids have risen dramatically in the last year. 

FX algorithmic trading and automated pricing has surged in the last year as traders seek best execution and minimal market impact, according to the head of Bloomberg’s FX electronic trading platform. 

Speaking to The TRADE, Tod Van Name explained that algo trading, automation of non-deliverable forwards (NDFs) and options pricing, and the use of pricing tools, such as trading grids, have all risen significantly during the last year. 

He added that while request for quote (RFQ) remains the dominant form of execution in FX,  algo trading is a contender for the top spot as it increased more than other execution methods over the period.

People do not want to telegraph what their interest is and they want to minimise market impact,” Van Name said. “If you are trying to execute a Korean NDF trade or an obscure trade like Sterling/Swedish, you don’t want people to know that you’re a buyer in the marketplace. By using algos you can drip that trade by using either a TWAP or VWAP and people won’t know what you’re doing because the name they get on the other side is the bank that you’re working through.”

Van Name, who heads up Bloomberg’s FXGO multi-bank execution and order management FX platform for hedge funds, regional banks, central banks, global banks and others, also attributed the rise in algo trading to increasing demand to trade emerging markets. Emerging markets trading is rising as participants look to find new ways of generating alpha and diversifying their portfolios leading to several market initiatives to be launched. 

Bloomberg launched an emerging markets equity index range earlier this month in response to the growing demand for a trusted source of advanced index capabilities in up-and-coming regions. 

Other forms of automated execution that have seen the biggest uptake in the last year is the automated pricing of NDFs and options due to an ongoing process of standardisation across the industry.

NDFs have historically been traded manually as they require a specific fixing date and source, which was difficult for banks to auto price because they could not be sure what the client might ask for. However, in recent years, as the markets have become more standardised, banks are more able to predict these requirements and stream pricing.

“We have seen a considerable uptick in banks that are able to provide streaming liquidity for NDFs, which is great and a lot of clients are really pleased to see that,” said Van Name.

Options pricing was also typically a manual process due to specific requirements which made it difficult to automate, such as forward curves or spot rates. However, like NDFs, upgrades to pricing engine technology and the process of standardisation means that banks are increasingly providing auto pricing for options.

“That’s useful for people who use options as a regular part of their hedging regime, because now they can actually get pricing instantaneously. As soon as they make the request they’ll get an auto-price back,” said Van Name. “This will prove interesting because once we get out of this zero interest rate environment and as economies start to take off, we’ll start to see increasing volatility in the FX market and people will need to use other investment tools.”

The use of trading grids at Bloomberg has also seen an increase as participants continue to look for flexibility around execution. Bloomberg’s trading grid allows clients to put numerous currency pairs or numerous instruments and whoever is in their bank of liquidity providers on a grid and then watch those stream throughout the day. Participants can then click on the bid they like the look of and execute a trade.

“That’s becoming exceedingly popular in fast moving markets when it takes time to actually initiate an RFQ and have a human pick it up, whereas the trading grid is all done by pricing engines, so it’s very fast and you can trade large notional amounts quickly with a wide range of liquidity providers,” said Van Name.

Working from home has also accelerated demand for tools that create efficiencies throughout the trade lifecycle, he added, as clients look for more than just liquidity, but vendors that can provide flexible execution methods, including algos. 

The pandemic and changes to working conditions have accelerated ongoing trends in the industry, including shrinking headcounts across the buy- and sell-side with ongoing pressure for traders to prove best execution.

“There is more and more pressure and oversight to prove best execution and to have a process in place for how you handle trades as many firms are asking their traders to do more with less. They are handling a larger book of work and there are fewer people doing those roles, so they need some way to manage those trades more effectively,” Van Name told The TRADE.

Most financial firms had the capacity for people to work from home but found it difficult to aggregate exposures from a variety of different internal systems from their living room. That’s where it really started to fall down.”