Marcus Samuelsson, portfolio manager at Ericsson, talks about what “best execution” means from a corporate’s perspective.
Profit & Loss: It’s often assumed that corporates are less sensitive to FX pricing because they view it as part of a broader cost of their banking relationship. Do you think that assumption is fair or is it a bit outdated now?
Marcus Samuelsson: While Ithink that you’re correctthat many corporates do think oftheir FX as being part of a broader banking relationship, for us this is not the case. We focus a lot on execution and pricing and now,with more and more FX trading happening electronically, it’s easierthan ever before to seewhere prices are and to ensure that you are getting good pricing. What’s key for us is that we measure everything and we actually receive P&L for the trading that we do, meaning that we’re clearly incentivised to ensure we get the best possible execution for our FX transactions.
P&L: How important is good data and benchmarking for you then?
MS: What I would say here is that transparency is absolutely key, especially so that people internally can understand what we’re doing. You can always make things more complicated by using a more complex and sophisticated benchmark, but it’s also very important for us to be able to explain internally to people at Ericsson, who don’t have experience trading currencies, how we’re doing.
P&L: How do you determine what is a good benchmark for your execution?
MS: When it comes to benchmarking, for us there’s always P&L involved and so that basically determines whether or not we’re performing well. But we also have a very experienced currency trading desk, we have maybe 80-85 combined years of experience trading in different types of markets and so we prefer to trust this experience, although as I said before, you still have to be able to explain what you’re doing internally. In many cases it’s been popular to give away execution to the banks, back in the day you just called up the bank and someone did the execution for you and took the risk, but we prefer to execute our FX trades ourselves and take risk ourselves, within a controlled environment.
P&L: How important are TCA tools for you when it comes to demonstrating best execution?
MS: Not very, although we use them once in a while. We have quite a lot of latitude to make trading decisions, which might be unusual compared to some other companies, because one of our keywords when it comes to execution is “flexibility”. We feel that it is important that we remain difficult to predict with regards to our trading activity, and that’s why flexibility is so important for us.
P&L: A common observation about the FX market is that it’s becoming harder to execute in size and therefore orders are constantly being chopped up into smaller pieces. Do you think that changes in liquidity are making it harder to hide trading activity?
MS: Absolutely. Electronic pricing is a double-edged sword in some regards because, on the one hand you have very tight prices, tighter than ever probably, but on the other hand, there isn’t a lot of depth in the market. So yes, there is a trend towards chopping up orders and we do that via algos or ourselves, with STP it’s quite easy to chop orders up into smaller pieces. This is also the advantage of having a flexible benchmark, it means that you can change your behaviour and adjust to markets so that you don’t become predictable. It’s worth pointing out that we try not to have a view on where things are going in the market, what’s key for us is finding liquidity and to do that we need to be flexible with how and when we execute our trades.
P&L: You mentioned algos there, do you expect your algo usage to increase in the future?
MS: It depends by what you mean by “algos”. If you mean the algos available via single-bank platforms, then probably not. We have used them occasionally, but mainly because we want to understand how they work and stay at the forefront of this technology. But if you mean simpler algos, like a VWAP or TWAP, then perhaps we will use more, although really we can do that type of execution ourselves.
P&L: Do you expect to see any shift going forward between how much FX activity you execute via multi-bank or single-bank platforms?
MS: We like to use the multi-bank platform because of the competition on them. We have a very strong relationship with our multi-bank platform, and while somewhere down the line we might need to put that into competition with other platforms, right now we don’t feel like that’s the case. When we use single-bank platforms, it’s either due to cash management or because we can’t use the multi-bank platform in some of the more remote locations that we operate in.
P&L: Finally, have new regulations, such as Mifid II, had a big impact on you? Similarly, although it isn’t actually regulation, has the FX Global Code of Conduct changed anything for you?
MS: So, the regulations that have followed the financial crisis do have an impact, but because corporates weren’t the main target of those regulations, the impact hasn’t been as significant as it has been for the banks. With regards to the Code of Conduct, we are in favour of anything that makes financial markets work better, because that ultimately benefits us.