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Northern Trust Launches FX Algo Suite

Northern Trust has
launched a suite of FX client execution algorithms, aimed at allowing clients
to manage their FX exposure with an enhanced level of control and transparency.

Dan Torrey, global
head of FX e-commerce sales at Northern Trust, tells Profit & Loss that previous trends amongst Northern Trust
clients currently utilising its algo suite suggest that many of them will focus
on using TWAP algos to minimise market risk/impact on larger orders, while
attempting to benefit from the greater transparency that is offered by the
bank’s post-trade execution reporting.

He adds that Northern
Trust currently offers five algo types that are “off the shelf”, they are
Iceberg, Peg, Coil, TWAP and TWAP Random (TWAP_R).

“This model allows the
clients to further reduce their footprint in the market,” Torrey says. “We take
client parameters of parent order size, time period, and number of child orders
and then randomise the size of the child orders and the intervals between these
orders to ensure our clients appropriately mask order intention to the broader
market. We built TWAP_R based on a specific client request and it is important
to note that Northern Trust offers clients this level of hands-on custom design
input into the creation of their own algo execution strategies. Our development
team is already working with several other clients to build the next wave of
custom algos based on specific client demand.”

In a press release
issued today Northern Trust says the FX algo suite is designed to provide
clients with greater flexibility in how their orders are placed, adding that it
allows them to access pricing through Northern Trust’s liquidity panel.

The liquidity panel
aggregates pricing from a list of liquidity providers across the globe, and the
bank says the custom execution algorithms will allow its clients to minimise
market impact on large orders and utilise a systematic, rules-based process to
offset their FX risk.

“The real power of FX
Algo Suite lies in Northern Trust’s liquidity panel,” says Tim Linehan, head of
operations at Silchester International Investors. “We have seen competitive
quotes and narrower spreads without a corresponding increase in counterparty
exposure, balance sheet risk or operating complexity for Silchester and its

There has been much
talk of buy side firms utilising algorithmic execution tools, but the actual adoption
of these tools has often lagged behind expectations. However, Torrey predicts
that a broader set of buy side firms is ready to start using algo execution
tools and that the adoption of them will accelerate in 2017 and beyond.

“Until the actual “science”
of FX TCA catches up to the point where the average investment manager has
access to better analytical tools and robust, real-time transactional market
data, then this adoption process may continue more gradually,” he observes. “Remember
that the equity market had a near 20-year head start on the TCA learning

Torrey notes that the
FX market has thus far seen some divergence in terms of adoption rates,
pointing out that the top 20-30 global buy side players have been utilising FX
execution algos for many years. At the same time these firms have invested a
lot of time and resources drilling down into all aspects of their transaction

“In doing so, both the
range of FX algo product offerings and the nascent FX TCA industry have grown
and become more mature through their popularity/lessons learned,” he explains. “Northern
Trust believes that, during the next stage, we will see much smaller firms with
historically less sophisticated FX execution programs begin to “take the leap.”
This shift in thinking will be driven by increased urgency at these firms to
better understand and actually quantify their true “all in” transaction cost
reality, as they look to expand their dealing options.”

Twitter @Galen_Stops

Twitter @Profit_and_Loss

Colin Lambert

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