cost is randomised out and
what you are left with are the
explicit savings from using the
algorithm.
Typically, we are on the
passive side of the market and
outperforming on arrival from
Mid. From a transactions cost
analysis (TCA) perspective, we
look at the point at which we
submit an order and how we
Andy and Alexcia Mazahreh on trading floor at Vanguard
performed against an arrival
Mid price. Over time, we beat
arrival Mid consistently on
How do you see your dedicated FX
our trades. That performance
trading function contributing to the
measure is not even taking into account
overall investment process and client
the alternative risk transfer price if a bank
satisfaction for Vanguard?
would have filled that order for us. This
performance statement is purely against
From my background as an equity trader
arrival Mid in the inter-dealer market and
and portfolio manager, especially on the
we are beating that. So, the algorithmic
index side, I was very conscious about
trading on FX has delivered massive
trading costs. FX was a natural extension
value to our shareholders by being able
of that process. We started analysing the
to warehouse the risk ourselves. The way
costs and charges to hedge and execute
I view our flow is that we are a liquidity
and tried to identify if there were better
provider to the market and we should be
ways. We found that the cost of trading
compensated for the liquidity.
currencies, especially if unwatched,
could be extreme. The greatest benefit
How do you foresee the trading
from establishing this desk is the added
technology landscape, with a few
ability to monitor and control these
incumbent brands, shifting in the
costs. We have added tremendous value
coming years? What will be the focus
to our shareholders. Over the course of
areas?
five years handling FX flow, we’ve saved
our shareholders significant transaction
Something that has been talked about
costs. Just in netting flow alone, we have
for a while is disintermediation, which
been able to avoid going to the market
is on the forefront of everybody’s mind.
with 1 trillion US$. That netting process is There are a lot of firms coming up with
in the best interest of our shareholders as creative abilities to disintermediate banks
it offsets flow with no market impact or
on the trading side. Banks will still have
transaction fees.
a dominant value add in the FX market,
Do you see that the FX trading
algorithms available for the buy side
today are robust and consistently
deliver better results?
The majority of our FX orders do not have
an alpha objective. For example we may
need Yen to settle a trade in Japanese
stock, if that order is small relative to the
size of the overall portfolio, we have the
luxury of being more patient and passive
with that order. Foreign exchange
algorithms are perfectly aligned with
our objectives, so we can chop a very
large FX order into many smaller pieces
and save on fees and market impact,
the only risk being the opportunity
cost from Yen going up or down. Over a
longer period of time, that opportunity
28
particularly with their ability to offer
credit, but I still think that we will see
more utility-based buy-side to buy-side
solutions with the objective to offset
flows. Even in these instances, you will
still need banks to provide credit while
you will not need to pay to offset the risk.
As an example, there is one firm looking
at a peer-to-peer matching solution for
swaps. They have tremendous potential
to become a significant disruptor.
Once buy-side participants get
comfortable with peer-to-peer matching,
the floodgates will open. A significant
amount of currency hedgers are hedging
their positions and portfolios consistently
throughout the year. It is not a business
that is changing often and you are
likely to remain on that same side of
the trade each month. Knowing that
www.buysideintel.com
96% of my exposure for the following
month is already offset by an opposite
position is tremendously useful from
an operational and liquidity standpoint.
Likewise, the opposite way flow would
have a high level of certainty that we are
going to be there every month to hedge
their positions. If peer-to-peer trading
develops, it would be an incredible
disruptor that would lower volatility and
result in significant fee savings.
With a significant level of opaqueness
and manual workload involved in
trading FX derivatives today, what
developments do you think are needed
to take this market segment to the next
level?
Peer-to-peer trading would create
more transparency in the FX derivatives
market if we had the opportunity to
match FX swaps with likeminded peers
in a transparent manner with a trusted
participant group.
I also think there will be more innovation
in using distributed ledgers like
blockchain, for collateral movement. This
could potentially eliminate counterparty
exposure risk.
People have talked about TCA for a
long time. There are now a few TCA
vendors offering advanced solutions
beyond post-trade analytics that also
offer pre-trade analysis, which is helping
traders to improve their execution. This
is needed as we see consistent flash
crashes and other disruptions in liquidity.
When markets become more electronic
the buy-side needs to know how to use
these credibly. While the market is open
24 hours a day, it doesn’t mean that you
can trade at any point in time. Analytic
tools are instrumental in finding the
‘black holes’ so participants can avoid
them. If they are trading within these
time-periods, at least help them put the
right limits so they don’t cause minor
disruptions like we have seen in the last
two years.
We noticed on social media that your
colleagues named you an “inspirational
leader” and that you are active in
diversity and inclusion initiatives
at Vanguard. Could you please
elaborate on your drive and passion for
leadership, diversity and inclusion?
Channelling a diverse and inclusive
environment in the workplace is
Summer 2019