Institutional investors in Asia are starting to use execution algorithms for foreign exchange trading, as global awareness spreads of the implicit costs of FX transactions. It comes in the wake of lawsuits in the US involving firms such as BNY Mellon and State Street.
Aside from the traditional FX algo client base of macro and multi-strategy hedge funds, pension funds and sovereign wealth funds in the region are showing interest, says Jonathan Wykes, global head of advanced execution services (AES) FX sales at Credit Suisse in London.
The bank’s global FX algo trading average daily volumes have been growing 20-30% annually for the past few years and are up 35% in January over last year. The number of clients “on-boarding” in Asia was twice that in Europe for the fourth quarter of last year, notes Wykes.
The AES FX algo flow already accounts for a "significant proportion" of Credit Suisse’s spot FX volume globally, and he suggests it is about to go “viral”, with volumes doubling within the next six months. He declined to be more specific about the actual figures.
Wykes points to the fact that the bank has always distributed its algos via all the main order/execution management system providers, making it easy to integrate with a client’s workflow.
Initially macro hedge funds and prop desks were the dominant users of Credit Suisse’s FX algos. But since the fourth quarter of 2010, the bank has been linked to other front ends such as FX Connect and Charles River Development and will this month link to FXall. These systems are widely used by pension funds, says Wykes, hence the bank’s market share is rising in that space.
Another reason institutions may be attracted to Credit Suisse's offering, says Wykes, is that it is agency-only, unlike that of many of its rivals. The bank charges a commission – which is entirely transparent – whereas others often generate margin from the trades, he says. This issue has been highlighted in recent years by the cases brought by pension funds such as the California Public Employees Retirement System alleging overcharging by certain custodian firms.
In Asia, it is largely the regional arms of European or US pension funds and corporates that are starting to use algos for FX trading, says Wykes.
As for home-grown Asian firms, it’s still early days for FX algos, says Wykes, but Credit Suisse has seen a lot of interest from sovereign wealth funds. “That’s a big opportunity in this region, because these funds don’t want to be seen in the market and are very concerned with information leakage,” he adds.
In terms of strategy, traders in Asia tend to be more passive and patient than in, say, Europe, because it is easier to have market impact, due to lower liquidity in certain pairs. But they are doing relatively large and relatively long-duration trades, with $50 million to $100 million trades common.
“They are typically putting them on in the late afternoon in Asia, when liquidity is greater, and executing them into the European morning,” says Wykes.
Moreover, institutional investors in Asia are starting to use equities-style benchmarking and best execution – using, say, implementation shortfall or volume-weighted average price (Vwap).
FX best execution for a pension fund has historically meant lining up several banks, signalling its intentions and taking the best bid or offer, says Wykes. But banks prefer not to put themselves at a disadvantage by providing their best price when competing with others.