QUICK TAKE: JPMorgan Readies Next-Gen FX Algos
Algorithmic trading is entering its second phase.
If phase one in the forex markets was the electronification of trading, bulge bracket broker JP Morgan is leading the charge into phase two and the next generation of fx algorithm development
As first reported in Finance Magnates, JPM is now using order break-up strategies to minimize market impact and ultimately deliver to investors better entry levels on their positions. Slippage due to large orders is traditionally one of the major issues for currency traders.
Also, the incorporation of machine learning tools is gathering speed and changing the landscape as simple buy and sell orders with relatively straight forward parameters is giving way to a more quantitative approach with dynamic pricing.
JPM said the latest generation of algorithms which are getting increasingly more popular with eFX traders are called Time-Weighted Average Price (TWAP) algos. They enable clients to select a different time frames over which a trade can be executed. Another similar tool which has become very popular are volume-weighted average price (VWAP) algos. They are used to normalize the time schedule depending on the expected distribution of volume.
The company’s Head of Macro eCommerce Chi Nzelu explained that the tool represents an optimization feature which uses simulated data from different market situations and market conditions. DNA selects the best order placement and execution style with the sole goal to minimize market impact.
“It then uses reinforcement learning – a subset of machine learning – to assess the performance of individual order placement choices,” Nzelu said.
Algorithms have become more prevalent in the spot FX market.
QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.
Breaking data silos is key to deploying automation beyond 'nuisance' orders.
They can be used on quantum hardware expected to be available in 5 to 10 years.
Streaming blocks change the basis of matching and price discovery so institutions can find new liquidity.