Banks in recent months have launched an array of technologies aimed at helping FX investors make and execute trading decisions. Algos are expected to be used by 18% of institutional investors by the end of the year, according to Greenwich Associates.
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| Corporates are often selling at 10 to 20% margins, so a few basis points on FX is not always going to be important John Grout |
The biggest users of technology are hedge funds, who have embraced real-time adaptive and stealth logic technologies. Now long-only managers and corporates are getting in on the act, with a view to picking a basis point through finding tighter bid-ask spreads on daily transactions.
“Some executors do not wish to go entirely algo, because they want to retain control of order placement, timing and duration, and they are turning to solutions that give them some insight into the way the market may trade so that they can tailor their intraday strategies,” says Adam Myers, European head of FX strategy at Crédit Agricole.
Crédit Agricole recently launched a mapping tool for intraday execution aimed at highlighting hot spots of volatility and probable trading ranges.
“Corporate treasurers or asset managers looking to minimize hedging costs or add execution alpha can make small cumulative daily returns, which of course can add up over the period of a year,” says Myers.
Corporate treasurers are differentiated to their currency manager counterparts by the fact their trading activities are driven by the needs of the business. Order frequency is determined not by market movements but by currency requirements, and generally must be executed soon after the request is received.
“The most common pattern is more corporate treasurers to receive orders from the business overnight, which they are inclined to execute in the morning when they come into work,” says John Grout, London-based policy and technical director at the Association of Corporate Treasurers (ACT).
“I would say up until now the focus has been on avoiding periods of high volatility, because the last thing a treasurer wants is to run an open position if the market price is all over the place.”
Meaningful surprises
The use of predictive volatility tools is helping treasurers target specific points in the intraday volatility cycle, often based on realized volatility readings from similar periods, filtered by ‘meaningful surprises’.
High-frequency realized volatility measures are preferred because of the impact of electronic trading on bid-ask spreads, producing volatility ‘cardiograms’ as well as event spaghetti plots – depicting the past 10 spot moves in the wake of a given calendar event – and fan plots showing post-event trading ranges.
According to Crédit Agricole’s Myers, corporates can choose either to make on-market trades, or order off-market with a view to targeting specific trading windows.
“If for example you think the market is too pessimistic regarding an economic release, you can leave a series of orders to buy or sell away from the spot rates, at levels identified by the mapping tools,” he says. “The key is that in any event you are better informed before the trading day begins.”
Investors using intraday volatility tools might expect to make gains in the region of 30 to 50 basis points a few times a month, bankers say. From the banks’ point of view, that might seem to be a valuable gain, and of course it helps to “start a conversation” with clients that might lead to cross-selling opportunities.
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We are fundamental and discretionary in our flagship programs, so we don’t have a need for these tools...
Paul Chappell
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However, according to the ACT’s Grout, those type of pick-ups are not high on the list of priorities of most corporate treasurers.
“You have to remember that corporates are often selling at 10 to 20% margins, so a few basis points on FX is not always going to be important,” he says. “Also corporates are usually one-way traders, for example buying dollars to service supply chains, and that means that they are less interested in generating pure trading opportunities. To be honest, it’s not something they get rewarded for.”
Paul Chappell, chief investment officer at C-View management, says he welcomes bank efforts to provide tools that might help execution around fixings or large orders, but admits he does not have much use for many of the solutions.
“We are fundamental and discretionary in our flagship programs, so we don’t have a need for these tools, although our new systematic program uses some fairly simple analysis that gives an indication of when in the day there is most liquidity,” he says.
“However, on the whole we are looking to put on trades when we can tactically find the best price rather than simply targeting tighter spreads.”