Vol boosts rules-based trading services

More users – and more platforms – turn to auto-RFQs for smaller tickets

As volatility returned to foreign exchange markets over the past six weeks, buy-side traders have been leaning more heavily on automated assistants – services that allow users to obtain quotes and execute trades without human involvement.

It’s a temporary surge in demand that platforms see as part of a wider trend – and competition is starting to heat up. Established services are adding bells and whistles, new platforms are rolling out their own services, and all of them are trying to fend off similar offers from standalone execution management systems (EMSs).

“This is going to keep increasing year on year,” says Jill Sigelbaum, head of FXall. “Everyone wants to get rid of the noise and execute small orders automatically, so they can focus on moving their large orders.”

Around 200 of the platform’s customers auto-execute some of their request-for-quote trading, she says. As FX volatility spiked in March, the platform saw a surge in users asking to be set up to use the service, says Sigelbaum.

At 360T, automated execution made up a larger share of trading in March, even as volumes hit a record high, says the platform’s chief growth officer, Simon Jones.

Now Bloomberg is looking to join the party as well: “For fixed income, we went live in 2019 due to greater demand from the buy-side client base and because it was already happening on some other venues,” says Ravi Sawhney, the company’s head of automation and analytics. “Now we’re working to release Rules Builder technology to the FX market in the first half of this year.”

‘Nuisance’ trades

Broadly, these services all aim to do the same thing: allow users to specify parameters within which trades can be executed automatically. Common parameters include the size of trade, the currency pair, dealer names, and some kind of price threshold – potentially expressed as a spread to mid.

At FX Connect, the system is typically applied to smaller trades in the most liquid currencies, says Beverley Doherty, global head of the platform. Users of the service see it as a way to limit the time and effort associated with these trades, so they can focus their attention on larger orders.

360T’s in-house EMS is also commonly used to automate smaller trades, allowing firms to send a request for quote (RFQ) to a defined group of providers, checking the prices that come back are in line with a benchmark, and then executing and allocating the trade back to the user.

“All of that process requires zero human intervention,” says Jones.

Everyone wants to get rid of the noise and execute small orders automatically, so they can focus on moving their large orders

Jill Sigelbaum, FXall

Generally, this means auto-execution services account for a relatively small slice of a platform’s volumes by notional size, but a much larger proportion by number of tickets. But the specifics do vary, and each provider claims its own special features. Among those features, there is a growing focus on helping users select the best way to trade – or the best dealers to trade with.

CME-owned EBS may be best known as a central limit order book, but the venue also has an institutional platform with around a dozen large buy side customers. The service allows RFQs to be automated, alongside a range of other options. Jeff Ward, global head of EBS, says the platform can “predict the best combination of liquidity providers and the optimal way to execute for a particular set of trades.”

Believing it a recipe for success, CME has allocated the platform an investment budget to scale out the business.

FXall is also adding to its service. A new tool will allow larger orders to be sliced into smaller pieces – giving users a wider range of execution choices, including automation. The venue is also expanding the range of parameters users can set, and plans to expand on its pre-trade analytics as well, so the automation service has its own guide to which dealers are offering the best prices and liquidity for a given trade.

Bloomberg is also planning to offer vetting capabilities when its FX service launches, leaning on work it has already done for other asset classes.

“As we build out new functionality in fixed income or equities we can ask ourselves, would this make sense in FX? For example, we are looking to leverage technology we have developed for dealer selection, which enables clients to overlay streaming liquidity and historical performance over a period of time to determine who to put in competition on an RFQ,” says Sawhney.

Multiple choice

Before they even get to the intricacies of each service, FX market participants first have a bewildering array of FX platforms from which to choose. Standalone EMSs cite this as an argument in their favour – why use the auto-trading feature at a single platform, when you can automatically tap the liquidity on offer at multiple platforms instead?

Medan Gabbay, chief revenue officer at multi-asset order and EMS vendor Quod Financial, believes FX venue buy-side automation generally is “rudimentary in form and entirely unmatched to the capabilities of typical sell-side technology”.

“Using venue-based automation immediately limits your ability to interact with a fragmented market trading across multiple pools,” he says. “This leaves the user vulnerable to sudden market moves, flash crashes and gaming by more advanced participants.”

Gabbay argues that, from a customer’s point of view for best execution purposes, it makes more sense to use a service that is not tied to a particular venue. “Clients using venue-agnostic technologies can make use of powerful real-time data and decision automation tools across multiple venues, not within just one,” he states.

The venues don’t agree, of course. One platform executive claims EMSs generally struggle to meet the expectations of large asset managers in terms of workflow tools – such as netting and trade allocations – or in terms of regulation. Many multi-dealer venues will be subject to regulation in both Europe and the US, whereas EMSs are often treated as software providers.

“That limits them. There are many clients who won’t trade via those services because of that,” says the executive.

Additional reporting by Duncan Wood