Buy-side Perspectives Issue 17 | Page 40

FOREIGN EXCHANGE Our desk trades a high number of tickets across various locations globally. Since we are a small team, we try to automate as much trading flow as possible. Today, around 90% of our trades are executed box-to-box, with traders using our exception management tools to monitor trade flow efficiently and accurately. Each investment programme has its own alpha profile, so an execution strategy is needed for each of them. Due to the nature of our business, we use execution algorithms where we can to execute our flow. The algorithms used need to complement the strategies’ alpha profiles. We use input from both our execution research team and the dealing desk to come up with the most suitable algorithm for each strategy’s risk profile. We find that algorithms allow seamless market access with extremely auditable pre- and post- trade Transaction Cost Analysis (TCA). We use a combination of both proprietary algorithms and broker/ bank provided algos. A trader’s day at Aspect is extremely varied and changes day to day, but the figure below gives a rough idea of how I split my time: 40 To what extent is your role dependent on data and do you believe that any forms of premium data-feeds are or potentially may become a ‘weapon’ of choice to compete in the future of capital markets? Data is the new Gold! Our whole systematic approach from signal generation to trade execution is data driven. At Aspect, data is key as we rely on computers to identify investment opportunities. We are extremely diligent with the data that we collect and use: it has to pass through various stages of review and approval (including from our legal department) before it can be used. Data will continue to be consumed in many forms and will most definitely continue to enhance the investment process. On the trading desk, new forms of data give us better granularity in pre- and post-trade TCA, especially in more opaque markets like FX Forwards, IRS etc. Thoughts on Algorithms? There are only a few types of distinct algos out there, currently pegged, time- slice, VWAP, limit based, implementation shortfall and, more recently, basket algorithms. I think that these algos will www.buysideintel.com continue to develop as clients’ needs adapt to the ever-changing landscape, particularly in FX markets. External algos will always have the challenge of having to cater for a wide range of needs and alpha decay profiles for instance, whereas internally developed algos can factor this information in right from the start. Bank algos can be useful when the price of developing in-house or buying an entire Execution Management System (EMS) is too expensive. You will also need to weigh up the cost of manual/naive execution vs the cost of technology enhancements. The Holy Grail of every market player is to have the ability to reliably forecast the future price at a given horizon. I don’t know of any external algo out there currently who offer this sort of alpha capture. In truth, if they have predicting power, will they pass it on to 3rd parties? Which areas of technology innovation do you foresee will make a significant change to buy-side trading in the next five years? It is more and more common to see buy- side firms seeking to eliminate ‘keying risk’ when executing orders and this area will continue to grow quickly. We built our own internal Order Management System (OMS) and EMS a few years ago, but we have now partnered with Quod Financial who will be handling the EMS-side going forward. Maintaining your own EMS systems can be costly and can consume a lot of developers’ time, which could be spent on more important tasks like strategic projects benefitting the firm’s wider objectives. Connectivity craftsmanship is also expensive and time consuming from a research point of view. When creating your connectivity, you need to consider the microstructure and quirks of each venue. This task takes time, is expensive and changes all the time. So, the build vs buy conundrum will continue over the next few years. Algorithms will continue to improve. Tier 1 dealers have long used real-time visualisations to monitor their own hedging behaviour, plots paid/given Winter/Spring 2020