FX Connect sees
growing demand
for FX execution
automation
A
s the FX marketplace matures in the
accessibility and transparency of currency
pricing, the need to redefine and simplify
workflows becomes paramount. The quality of
electronic trading improvements has led to a bifurcation
of trading requirements. On one end, high-touch orders
requiring a significant amount of trader oversight have
benefitted from enhancements in accessing market
liquidity, often in conjunction with algorithms and/
or other active trading strategies. At the other end of
the spectrum, low-touch orders, trades with a smaller
nominal value, still make up a large part of daily
execution needs. Within the context of these low-
touch orders, market demand for intelligent execution
strategies coupled with an increasingly high focus on the
quality of execution have driven the case for automation
within FX Connect.
Managing low-touch orders inside an Execution
Management System (EMS) such as FX Connect generally
requires a similar level of detail to ensure best execution
principles are met in the same capacity as high-touch
orders, however, these smaller value deals can often
comprise a substantial percentage of the overall daily
execution blotter. This activity may detract a trader’s
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attention from more pressing needs; other asset class
activity, general market surveillance or directly managing
more sensitive FX executions.
Certainly, within the FX Connect platform, aggregating
and netting currency exposure offers significant
benefits to the asset owner and creates efficient
execution pathways, but this opens up two interesting
observations. First, and perhaps most importantly,
what is the appropriate benchmark for any currency
execution? Ideally, managing the execution at the point
of incurring the FX liability is one thought process. If
the FX execution can occur concurrently or just after
the underlying security execution, an asset manager
can reduce operational implementation shortfall and
minimize volatility risk associated with waiting for a
potential transaction opposite in direction and quantity.
And this begets the second observation - does any
trader have insight as to the certainty and timing of such
potential transaction? This ‘operational implementation
shortfall (OIS),’ defined as the opportunity cost incurred
from the time of the security transaction completion to
the arrival price on the FX Connect blotter, represents the
target for automated workflows. The opportunity cost
associated with OIS is equivalent to the uncompensated
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Winter/Spring 2020