Electronic Trading Grows in FX

Shanny Basar

R5, the electronic venue for trading emerging market foreign exchange, is expanding to Singapore while there is increased demand for algorithmic trading in developed markets.

The Monetary Authority of Singapore has given regulatory approval to R5 to launch in the country which is strategically important due to the significant volume of trading in emerging and local market currencies.

Jon Vollemaere, chief executive of R5, told Markets Media: “A year from now we anticipate between 50% and 60% of our volume to come from Asia. We plan to open an office in Hong Kong in the next year and launching in Shanghai at some point.”

R5 was developed after banks found an increase in demand for emerging markets currencies but found it difficult to trade in markets dominated by voice broking. The fintech firm went live with its London clients during the fourth quarter of last year to trade non-deliverable forwards in 10 currencies – seven in Asia and three in Latin America – where there are on-shore capital controls. The firm aims to launch spot trading in six currencies this quarter – China, Russia, Turkey, South Africa, Mexico and Thailand.

“Many of our Singapore clients were involved at the inception of R5, seeking an electronic alternative for NDFs and emerging market FX to better service their customers and hedge their risk,” added Vollemaere. “We will be focussed on the enhancing the currencies we support, such as enabling non-standard amounts and maturities for NDFs.”

The fintech company has two liquidity pools – one for the interbank market and another “all-to-all” market which is open to all regulated financial institutions. Vollemaere said: “The OpenMarket liquidity pool is being increasingly used by non-bank market makers, buyside firms, some banks, and local brokers who have difficulty trading emerging markets.”

Regulators have also encouraged electronic foreign exchange trading to increase transparency following their investigations into price rigging. Spot foreign exchange trading is not covered by MiFID II, the incoming regulations covering European financial markets from 2018, but that does not mean the asset class completely escapes increased scrutiny. MiFID II expands best execution requirements to non-equities and although spot FX is not included in the mandate, it is unlikely to be excluded when asset managers start monitoring execution across other asset classes more carefully.

David Mechner, chief executive of Pragma Securities, an independent provider of algorithmic trading tools, told Markets Media: “The FX market is changing very quickly and we are hearing from our bank clients that they are getting a lot more requests from the buyside who want to use algos to trade FX.”

Mechner said that while some of the largest and most sophisticated funds have acted as the key drivers of adoption, there is now broader demand from real money investors, hedge funds and corporates – and from the banks that serve them – for algorithmic trading capabilities designed to mitigate risk and improve trading performance.

Pragma Securities has launched a new execution algorithm designed to improve average execution performance against the daily 4pm WM/Reuters foreign exchange benchmark fixing which was changed in February last year. After the FX rate-rigging scandal, the calculation window for the WM/R benchmark was extended from one minute to five minutes for the most liquid currencies.

Research by Pragma found that the rate change during the first minute of the five-minute window predicts a continuing rate change in the same direction over the subsequent four minutes, and a reversal or reversion starting shortly before the end of the window. The firm said the magnitude of the pattern is significant, particularly for month-end and quarter-end, when many buy-side firms concentrate their fix trading.

Mechner added: “Pragma has developed an execution algorithm that takes the patterns described in this research note into consideration. The algorithm observes only publicly available information, and adjusts its trading rate in a systematic way based on those observations to achieve better execution on average for traders benchmarked to the Fix.”

He said these dynamic adjustments are layered on top of a proprietary trading schedule that achieves lower tracking error against the benchmark than a simple time-weighted average price algorithm.

“Our research shows that the buyside is incurring high market impact costs by concentrating their trading at the Fix, and this may not be optimal,” added Mechner. “We hope the research contributes to an industry dialogue on how to make the market more efficient.”

Featured image via COSPV/Dollar Photo Club

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