Currencies flow market-maker of the year: Credit Suisse

Risk Awards 2020: Swiss bank shows block trading can still compete in the age of the algo

John Estrada

In recent years, when putting large electronic spot foreign exchange trades through a liquid market, the focus has been on limiting market impact to avoid the price moving away from the client.

To do this, the trend has been to split up large trades into increments as small as $1 million, and to use algorithms to send these trades across a number of markets over time to hide the presence of a larger order. But while effective, this approach isn’t suitable for everyone.

“The market pushed clients into chopping up trades into smaller bits that the market was able to digest,” says John Estrada, head of the electronic forex trading group at Credit Suisse. “Clients would say that all they really want to do is buy 250 million EUR/USD, but there’s no solution. And so they would have to buy a system or spend money on data analysis.”

But there is another way – trade the whole size in a block. While it’s an out-of-fashion idea, Credit Suisse says its electronic block approach can often achieve lower market impact – and therefore better prices – than splitting trades up into small parts.

Its block trading capability was rolled out in December 2018, and the bank estimates it saves clients $16 per million by trading in a full amount with Credit Suisse rather than using a more traditional time-weighted average price algo that would fracture a trade. Over the course of a year, that equates to a saving of $7.2 million, the bank says.

“Clients like the story and when they realise they can save or make more money, then they like the story even more,” says Estrada. 

Indeed, clients have embraced the bank’s new block trading capabilities: “They are the only bank that prices EUR/USD up to $400 million in the full amount to us. Furthermore, their impact in the market when trading with them is very limited as far as I can tell,” says Tjerk Methorst, senior trader at PGGM.

Credit Suisse’s block trading prowess is powered by its artificial intelligence pricing tool, which has been rolled out slowly since 2017. The kit aims to predict which way the market will move in the next few minutes, and has helped Credit Suisse tighten up spreads in both small and large size, helping it win more business.

“We realised that this advantage we have with the AI engine allowed us to start quoting larger amounts. As we started rolling out larger sizes, clients were more interested and it turned into a positive feedback loop,” says Estrada. 

Another key step was the formation of the bank’s International Trading Solutions group in July 2017, which combines its wealth management and global markets businesses.

For forex, that has enabled higher rates of internalisation – the process of matching offsetting trades within a franchise – as the trading desk has access to a wider set of internal flows. Ignoring mid-book platforms Credit Suisse internalises 99% of its forex trades, which keeps hedging costs low.

Justin Mitrani

“With broader distribution and a more diverse set of clients, we’re able to internalise more of our business and reduce the amount we hedge in the market. This, alongside block trading and the use of AI, improves trading outcomes for our client base,” says Justin Mitrani, head of electronic FX and rates sales for the Americas at Credit Suisse.

The block push has catapulted the bank into top spot with some clients: “Credit Suisse has been by a long way our most improved liquidity provider over the past 12 months. They’ve come from lower bound rankings for volumes and value, up to a top three consistent contender – and more recently our number one provider,” says a trader at one forex brokerage.

Flows in large size are still modest but they are growing. In 2015, just 0.5% of trades at the bank were done in more than $50 million increments, while that has now grown to 2.5%. Meanwhile, trade sizes between $20 million and under $50 million now make up 8% of the flow at Credit Suisse. Hit ratios have also improved by 50% since 2015.

The bank now streams in sizes of at least $50 million in 16 of the 20 most liquid currencies, as determined by the Bank for International Settlements. In the remaining four pairs, Credit Suisse streams $35 million to clients. Outside the top 20 crosses, which include pairs such as US dollar/Israeli shekel and euro/Romanian leu, the bank streams offers in sizes of $20 million and $35 million, respectively.

Furthermore, Credit Suisse’s spreads have tightened between 20% for liquid pairs and 50% for illiquid pairs in size over the past couple of years, indicating its confidence in pricing block sizes.

“Historically, trades this size could only be done via a voice desk or if clients leveraged an algo. The full amount offering allows clients to transfer risk electronically in larger sizes and competitive spreads,” says Mitrani.