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What are the Key Drivers of Buy Side Algo Adoption?

What are the Key Drivers of Buy Side Algo Adoption?

A number of factors, including the increased need for an audit trail for FX execution and a desire to limit market impact, are driving the adoption of algorithmic execution tools amongst buy side firms, says Petra Wikström, global head of execution and alpha solutions at BNP Paribas.

Although Wikström says that the continuing automation and electronification of the FX market naturally leads to more firms broadly using algos as one of their execution tools, there are other specific factors driving the adoption of algo tools by the buy side.

One of these, according to Wikström, is the desire to limit market impact, something that she says has become more acute as buy side firms have become concerned about the depth of liquidity available in certain currencies. Algos enable firms to limit the market impact of large or medium sized trades by breaking up into smaller sized trades and executing them over a period of time.

In addition to this, Wikström points to regulatory changes – such as Mifid II – as a driver of buy side algo adoption. She comments that “one of the key requirements is for investors and the whole industry to put processes in place for providing best efforts of demonstrating best execution to the end clients, and naturally one of the things that’s been used for that is transaction cost analysis, TCA”.

Wikström adds: “TCA doesn’t necessarily mean best execution, it’s a tool to help you demonstrate best execution and what you need naturally for TCA is an audit trail and one piece that algos help with is providing that audit trail.”

You can watch the full video here: