If this had been rolled out a year ago it would have been a pretty unique offering, but that should not take away from the excellence of the development. Put simply, the Peg Algo allows a customer to do all the pre-trade work in terms of how it is going to execute the risk, including executing into bespoke pools of liquidity – that ECN idea again – and then use Barclays’ proprietary execution logic to trade.
It is a simple but effective way of ensuring the client and bank interests are aligned and, importantly in this day and age, minimises signalling risk and market impact. Barclays has not had the best four or five years in e-FX in terms of investment, but it is coming out the other side and part of its efforts of the past two years has been to enhance its execution logic – this it has now opened up to clients.
In many ways this is a different approach from the ‘old’ Barclays ethos of taking the flow in and handling it, this more reflects the open era in markets, while provided crucial anonymity to the executing client. The algo uses last look (we have to confess P&L’s managing editor is mystified why someone with a specific interest would care if someone deals and the market is half a pip away in milliseconds) and prices according to how the bank is pricing other clients. If the bank widens its price then the peg algo automatically widens as well – it is about providing the client with access to the same procedures, tools and services that the bank uses itself when operating in markets.
In many ways the Peg algo builds on the still popular Gator, the bank’s aggregated liquidity window and given how well Gator has survived the years of under-investment, there should be an air of optimism around Peg.
Capital allocation to FX swaps businesses remains a tricky area and some believe it is this complexity that is stopping the swaps market from developing not only a CLOB but also greater automation levels. If that is the case then Barclays has taken a serious step forward by solving what is effectively a technology challenge.
The concept is the bank views potential trades as risk additive or risk reducing, and prices accordingly. If a customer is interrogating the three-month Cable price then the bank’s pricing engine will know the impact on the balance sheet and exposure to the client depending upon what side of the price they hit. If one side is risk or capital reducing, the bank will show an axe on that particular trade.
This is very granular pricing and would seem ideal for the e-FX environment and, more importantly, the current regulatory environment. Clients get a better price, the bank sees higher e-FX swaps ratios and can reduce the capital used in the business, thus opening the door to more client business.