From The Management

FX trading for asset managers and the ‘rise of the machine’

8 October 2021 Roger Lee, Head of Sales for EMEA, BidFX
Just as Amazon started out selling only books, before dominating the entire online retail world, so it seems for FX platforms, which began by offering simplicity in execution and have now evolved into slick interfaces that are enabling a progressively wider realm of services than one might expect.
FX platforms now offer multi-asset managers an entire suite of services—from spot execution to swaps, emerging markets/NDFs, FX options, futures, data analysis, and algorithms—catering to various needs, from pre-trade all the way through middle-office risk management to back-office settlement and audit.
While FX is by far the most liquid asset class, with turnover of around $8.5 trillion (£6.3 trillion) a day, access to that liquidity has historically been quite fragmented for multi-asset managers, many of whom still rely on individual banking relationships for pricing and execution.


However, the growth of Execution Management Systems (EMS) has opened a whole new world where the ‘buy side’ can access the latest execution technology and centralise the relationship with their liquidity providers to ensure that their underlying clients are getting proof of ‘best execution.’ In addition, they can also tap into transaction services across the other major asset classes— including futures, fixed income, and equities — as well as analytical capabilities such as Transaction Cost Analysis (TCA).
EMS offer a plethora of advantages beyond just greater liquidity. They enable clients to gain access to a wide realm of trading protocols that essentially give them the ability to save money and reduce market impact when compared with more traditional styles of trading.
Large, market-moving trades can be broken up into smaller pieces, minimising spreads, and therefore costs. Importantly, the manager can retain control of the execution process, maintaining the ability to switch tactics as required, rather than abdicating the responsibility to a third party.


These features that focus on trade execution help multi-asset managers that predominantly see FX transactions as a hedging exercise, where cost control is a vital element. However, the evolution of multi-dealer platforms can, in addition, offer managers a raft of services that can also generate alpha.
Data analysis—where size really does matter—is enhanced by the ability to pool information from a variety of sources, rather than relying on a single proprietary provider. This in turn enhances the effectiveness of algorithms and machine learning, which can help identify trading opportunities that previously would have remained undiscovered or overlooked.
While the idea of trading based on Artificial Intelligence (AI) still may be far from the day-to-day reality of most asset management firms, the use and value of “big data” is much more clearly understood as the world of commerce increasingly becomes data driven. That reality is prompting more asset managers to test the waters and gradually embrace the advantages of semi- or fully-automated trading solutions.
For many, the first advantage is the speed of execution, which buys them the most precious commodity of all: Time. With that time, managers can start to investigate all the other services that automation provides, such as data collection and analysis to enhance research, along with complex algorithms to identify trading patterns.


As technology makes time march faster, nowhere is the pace quicker than in financial markets, where advances occur at exponential speed with Fintech firms popping up almost every week to offer the buy side ways to optimise their trading and workflow management. However, some of these independent technology experts that are willing to navigate the client through the seemingly complex paradigm of trading technology are too closely connected with the sell side for comfort.

The ideal solution may lie in an agnostic middle ground, where all of these elements can be united. Just as Amazon brought buyers and sellers together on the same portal, FX platforms are creating a symbiotic relationship between the liquidity provider, the liquidity taker and the technology solution. Instead of being on the outside, that combination has brought asset managers front and centre.

This article also appeared on Global Investor.