The global FX market lends itself well to electronic trading, and traders and platform providers are responding with execution tools that rival those found in more mature equity trading platforms. Electronic trading means greater choice for FX dealers and asset managers to channel their order flow toward the venue that will provide the highest liquidity.

“Our trading mantra is if you feel that you want to trade electronically, great,” said Lee Sanders, head of trade execution forex and fixed income at Axa Investment Managers. “If you want to trade on voice, great. If you want to use an algo, great. What it really comes down to for us is efficiently running the business. A trader knows the market better than anybody, and has a feel for whether an order is worked better from a platform or needs some care and therefore is potentially executed via voice.”

The emergence of electronic trading platforms has changed the dynamics of the $5.3 trillion a day global FX market.

“Part of the market is extremely electronic on both the client and market maker sides,” said Stephane Malrait, global head of e-commerce, at Societe Generale. “At the other end of the spectrum, emerging market currencies and FX options are voice driven, and the ‘electronification’ is just starting for those products because of U.S. regulations.”

Axa IM uses KPIs (key performance indicators) and a 12-month moving average to track its electronic trading, both as a percentage of volume and a percentage of tickets. At the moment, around 70% of tickets, and about 40% of volume, are traded electronically. “Depending on the underlying market or environment we find ourselves in, this number may go up or down and that change could spark a conversation and educate us about underlying market conditions,” Sanders said.

A 2007 review by Russell Investments of services offered by 17 equity transaction cost analysis (TCA) firms revealed that none offered FX TCA, even though FX is an important element of many international equity transactions.

Seven years later, with the advent of TCA, FX traders have gravitated toward vendor-supplied trading platforms.

Axa IM decided about 18 months ago to review its use of ECNs in FX and the standard RFQ model and to focus its attention on execution management systems (EMS). “The main reasons for this was increased functionality and the transaction cost analysis we could obtain by using Trading Screen, an EMS provider which offered this service,” said Sanders. “Also, I was a little frustrated with the existing ECN’s somewhat limited offering. We wanted to look at resting orders, have more flexibility around NDFs and algorithmic trading.”

Sanders added, “It was definitely a well thought out change of direction for us, and we met a few providers in that space. Trading Screen provided more flexible functionality and definitely more granularity around the quality of the execution process.”

TCA is starting to emerge in FX with the advent of algorithmic trading. “Liquidity providers or FX technology vendors need to provide TCA tools to see if algos are efficient,” said Malrait.

The other option is for users to develop their own TCA tools. “On the equities side, TCA tools are quite mature, whereas in FX, they are in an early stage of development,” said Malrait. “In equities, you have a reference market price and price transparency, which FX doesn’t have. So the way you analyze your algo is quite different.”

Electronic trading in FX offers the same high touch/low touch choice available in other asset classes.

“The advantages of being more connected and getting more reach lies not necessarily in having to use the phone to process a lot of smaller tickets; if you’re processing small Eurodollar multiple tickets, it doesn’t make a lot of sense to be constantly in touch with the salesperson,” said Sanders. “Bigger orders, which need more care and are more swap related rather than spot related, or have a forward leg to it, often need to be ‘worked’ a bit more.”

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