As experienced corporate treasurers know, even in the multitrillion-unit FX markets, a single large position can shift a market price. That’s why, to avoid unfavourable price fluctuations which would increase their hedging costs, seasoned treasury staff split large-volume orders into smaller trades, or clips.
When doing so, a treasurer is faced with an optimisation problem across two fronts: speed and market impact. On the one hand, the longer the process lasts, the higher the risk that the market will move against the company mid-order, resulting in the overall price achieved being higher than the initial target price – individual clips have to be large enough to execute the hedge swiftly. On the other hand, the clips should each be small enough to make a minimal impact, to avoid influencing the market price, pushing it upwards to the detriment of the company.
Finding the optimum
The optimum size of a single clip depends on the liquidity in any given market at a given point in time, which can change from one second to another. A perfectly acceptable ticket size in a favourable market environment may already be too big just a few seconds later. But if the market price does not respond to a mid-sized clip, this might suggest the liquidity is better than expected, allowing the execution to be carried out quickly, in larger portions. If, by contrast, a single ticket suddenly moves the market rate, it might be advisable to take a short break or to proceed with smaller clips.The optimum execution strategy responds in real-time to prevailing market liquidity. The trick is to react blazingly fast to the information you receive from the preceding single orders as they are executed.
Enter the Algorithm
Analysing information swiftly is the domain of computers. In a structured environment like an electronic market place, a computer is superior to a human in three ways:- First, it can record and process more information at a time than a human. This means the machine can monitor a larger number of trading venues simultaneously
- Second, the machine’s response times are shorter. It reacts to changes in market liquidity much quicker
- Third, the machine does not have any capacity problems when processing a large number of small sub-transactions. A computer can effortlessly initiate 100 single transactions in the space of milliseconds.
In order to harness the power of algorithmic FX trading, a corporate need only turn to their bank.
The knowledge and skill of a single trader is no longer the only key to success in FX trading today.
|
CORTEX iX from BNP Paribas CORTEX Intelligent Execution (CORTEX™ iX) is the award-winning FX spot algorithm execution service from BNP Paribas. CORTEX iX has been designed to provide clients with access to bespoke algorithmic strategies whose primary goals are to capture price improvement, minimise market impact and ultimately achieve optimal execution by reducing overall transaction costs. CORTEX iX employs next generation “adaptive” execution technology to continually monitor the markets and interpret possible market movements. Using this intelligence allows CORTEX iX strategies to achieve optimal execution by adapting its execution behaviour.
|
