P&L Report Card: There is something of a
paradox in how the algo
execution space has become
much more competitive in terms
of providers, but the overall take
up – while it ticked higher last
year – remains subdued.
There is so much emphasis
on best execution, liquidity
management and analytics – most of which falls to the algo
execution teams to deliver – that one senses it is only a matter of
time before demand surges. If it doesn’t, there is a lot of client
facing technology to be accounted for, of course, but it should
always be remembered that a lot of the client facing ideas that we
see in the market have also driven upgrades in banks’ own ability
to participate in FX markets.
The long-standing leader in this field in terms of customer
numbers has been Credit Suisse with its AES FX product, and the
bank remains in a strong position. Indeed, we suspect that it is a
good example of first mover advantage, because, as we have already
discussed, there is a reluctance on the part of customers to pay for
execution over a single dealer platform. Those clients that are happy
to pay have been with AES for a long while and are clearly sticky. There is also the argument that AES’s roots were as an agencydriven
business; this is not a stage many of its competitors have
gone through, or indeed are likely to go through given the increased
demand for access to banks’ internal streams and liquidity pools.
What is heartening for the competition is that where there is
growth it is largely organic – customers are not necessarily shopping
around for a new algo provider, rather they are taking a keener
interest in what their current providers can offer.
In terms of competitors, the closest model to AES remains BNP
Paribas’ Cortex iX and as we have already observed, this has yet
again been enhanced – although mainly around the analytics piece.
Elsewhere, Citi has attracted attention for its algo execution suite
of products and appears to have increased user numbers, as has
JP Morgan for its revamped AlgoX product suite. Goldman Sachs
continues to impress, as does Morgan Stanley and UBS – the latter
two definitely lifting ideas from the equities space, as Credit Suisse
did all those years ago when launching AES.
Looking ahead, we expect 2017 to see Bank of America Merrill
Lynch make a move in this space, as will Barclays. Outside of the
top group of providers there appears little appetite to offer algo
products to clients – something that probably reflects the lower
levels of sophistication when one goes into the regions and clients
with specific risk transfer needs.
Although we see the algo execution space growing over the coming
years, the really interesting question will be how it grows. For all the talk
of the different strategies, it is becoming increasingly clear that at one
level, some clients are happy with a choice of aggressiveness, but there
is also a growing group – the members of which are more likely to fully
embrace algos – that are demanding greater sophistication.
Our best guess is that for all the strategies available, the larger
mechanistic hedgers will be happy with a TWAP and the more
sophisticated users will want the “special sauce” algo that just
about everybody offers – the one that interacts with the internal
streams and liquidity pools.
Either way, this area is set to grow, and the levels of competition
are going to get higher and higher.
Winner – Credit Suisse
The last year has very much been about the continuation of the
previous year’s work for Credit Suisse and its AES team, but
importantly the bank has the strong foundations in place so this retooling
has had a negligible impact on business levels.
The business model behind AES is clearly strong and, supported
by equally strong technology, increasingly sophisticated analytics
and good strategies, has ensured Credit Suisse stays at the top of
the algo provider tree.
What remains impressive about Credit Suisse is that unlike some
long-time leaders and pioneers in the e-FX space, it has not run out
of steam. It helps, of course, that we are talking about one aspect of
the business rather than an entire infrastructure, but notwithstanding
that, there is a clear commitment to AES on the part of the bank.
Over the past two years, the bank has responded to the increased
competition from its peers by enhancing its algo engine and smart
order router. It has also nuanced some of its strategies to respond
to the surge in interest for algo strategies that reduce market impact.
AES now provides excellent market colour and pre-trade
information on market conditions, market quality, spreads, volume
and volatility, as described in our Product of the Year write up.
Customers can access a summary view, and then drill down into
different areas for a more granular view. They can also access
estimates of the all-in price for end of a trade by data or by a
There is more flexibility about AES which is pleasing to see, users
can click to go to the Prime Trade GUI, which offers a list of
execution options and shows how they stack up against other
This means clients can apply filters about cost, time, risk,
execution rate, execution range, etc, based on their requirements.
The platform will show cost versus notional for different sizes,
expected trading cost and provides a cost/risk graph.
In terms of post-trade TCA, the execution performance report can
be broken down into a number of different categories. The bank has
rolled out yet more interactive reports where clients receive a data
file that includes time stamps.
They are also able to submit data on
other trades and receive a report detailing what the cost of the trade
would have been if it had been executed with Credit Suisse.
The past year has also seen the bank commence initiatives in the
forwards, and continue its work to develop algos for NDFs and US
Treasurys in the fixed income space. In rates, Credit Suisse has also
further developed links to its popular Onyx product.
Leaders remain leaders only through hard work, innovation and
attention to detail – Credit Suisse’s AES business epitomises these