FinTechAutomationAlgorithmic FX trading an “inevitable endpoint” for treasurers

Algorithmic FX trading an "inevitable endpoint" for treasurers

Algorithmic trading is becoming an indispensable tool for corporate treasurers as they seek new and efficient ways to manage their foreign exchange exposures, writes Curtis Pfeiffer.

The structure and make-up of the foreign exchange (FX) market has been transformed over the past 20 years. Once a voice-traded, bank-dominated market, the industry has evolved almost beyond recognition as a result of new technology, greater diversity of counterparties, and innovation in areas such as electronic and algorithmic trading.

The role of the treasurer has also evolved in this period. Research by the Association of Corporate Treasurers found that, rather than function independently, treasurers have become increasingly strategic with a greater focus on solving wider business challenges beyond their traditional remit. The role has shifted from being a financial specialism to strategic partnering; 36% of treasurers either directly define the organisation’s strategy or work in collaboration with colleagues to do so.[1]

Cybersecurity has also become top of mind for corporate treasurers, with 82% citing this area as their number one concern.2 40% of companies participating in a separate survey by Deloitte indicated that their treasury team has been recently affected by fraud, with most indicating that more than one remedial program has been required to stem the issue.[2]

The emergence of financial technology is also impacted the role of a treasurer. Planned investment in treasury technology, for example, is on the rise; more than 50% of treasurers looked to increase spending in 2017, up from 40% in 2016. However, treasurers are generally cautious in nature, so their enthusiasm to be leaders in technology development and adoption remains curbed.2 





Execution quality driving adoption of algorithms

But one area of trading technology that is increasing in popularity is algorithmic trading.

The FX market continues to underpin the stability of business and cross-border trade. With non-financial institutions such as corporates trading around $127 trillion a year, execution quality is critical.

“More than 50% of treasurers noted that FX volatility remains a challenge”

Managing foreign exchange exposures have always been a complex and challenging task for corporations – more than 50% of treasurers noted that FX volatility remains a challenge.[3] This has been exacerbated in recent years by the increased complexity of the market and greater fragmentation of liquidity as the number of venues and execution models increase. In addition, the sheer level of information that needs to be processed almost instantaneously in order to execute a trade is significantly higher than a few years ago, particularly in spot FX.

Corporate treasurers need the necessary tools to master the trading process and stay on top of all the data that is generated. That’s why, many are turning to algorithmic trading to ensure they achieve and can demonstrate best execution, while reducing the risks associated with their FX transactions.

A high performing execution algorithm will assess the current market situation and the available sources of liquidity at a given point in time, and make the optimal routing decision without the involvement of a human being.

This execution model has been growing in popularity amongst corporate treasurers. According to Greenwich Associates, there has been a meaningful increase in both penetration and the proportion of flow that is executed by corporates through algorithms as they seek to optimize their FX trading performance.[4]


Utilising TCA to measure execution quality

As regulations such as MiFID II and industry-backed guidance like the FX Global Code place greater emphasis on transparency and ensuring execution quality, there are stronger demands from corporates for tools that measure and evaluate execution quality. One way of achieving this is through the use of transaction cost analysis (TCA) tools.

Algorithmic trading lends itself well to TCA. An algorithm requires real-time market data and knowledge of how it is tracking against an order. This information can be logged and easily stored in databases and later utilized for TCA purposes by algorithmic providers.

Historical trading data can be reviewed against a number of metrics and factors, such as price benchmark, trade duration, venue traded, currency pair and trade side. This enables corporates to measure and understand if they are achieving high-quality execution on trades and where they can improve their trading processes to drive better trading performance and save money.


Greater sophistication to drive algorithmic growth

As electronic trading evolves, becomes more mature, and regulation continues to push for greater transparency, algorithmic trading will become an indispensable tool for cost-effective trading.

Today, the largest and most advanced trading firms in the world are amongst the heaviest users of algorithms because they recognise the benefits it provides. With corporate treasury divisions growing in influence and becoming more sophisticated, continued adoption and use of algorithms is an inevitable endpoint and will become an indispensable tool for them.


[1] The Business of Treasury 2017, The Association of Corporate Treasurers

[2] 2017 Global Corporate Treasury Survey, Deloitte

[3] 2017 Global Corporate Treasury Survey, Deloitte

[4] Greenwich Associates: Long-Term Investors embrace FX Algos, Q2 2017


Further reading: An overview of FX risk management tools and strategies

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