Pragma Securities has expanded its algorithmic trading platform, Pragma360, to include NDF products.
While the latest Bank for International Settlements (BIS) survey in 2016 showed that spot FX trading was down 19% compared to three years previous, it also showed that the NDF market grew by 5.3% over the same time period.
The growth of the NDF market, as well as the fact that these products increasingly trade electronically, is what prompted Pragma to start offering algorithmic tools for trading them, Curtis Pfeiffer, chief business officer at Pragma, tells Profit & Loss.
“The NDF market has evolved to a point where banks are streaming liquidity for it, it’s not just firms picking up the phone to get a quote every now and again. We’ve seen from the BIS surveys that the market for NDFs is growing faster than the spot market and so we envision that over the next few years more and more people will be trading algorithmically because the same benefits that hold for trading spot algorithmically also extend to NDFs,” he says.
Pragma clients can now utilise several algos to trade the Brazilian real (BRL), Korean won (KRW) and Indian rupee (INR), Philippine Peso (PHP), Indonesian rupiah (IDR), Malaysian ringgit (MYR), Taiwan dollar (TWD), Colombian peso (COP), and Chilean peso (CLP).
Discussing what type of algos he expects to be mostly frequently used by clients to trade these currencies, Pfeiffer comments: “I think that a lot of it will be TWAP-style algos, but if clients have a smaller order they may at times be more aggressive with that. They’re using the algos to manage the trade-offs regarding best price and reducing market impact, and those are similar benefits to when they use TWAP algos in spot.”
He adds: “What we’ve seen from clients so far is that how they’re trading NDFs isn’t that different to how they’re trading spot in terms what they’re looking to do and their trading objectives.”
Although these NDF products are substantially less liquid than the most commonly traded spot FX currencies, Pfeiffer explains that Pragma’s algorithms for trading the spot market take into account the liquidity profile of the currency being traded and the time of day at which it is being trades and says that this core logic is also used for the NDF algos.
Even within the list of NDF currencies that Pragma is offering algos for, there is a big disparity in liquidity. For example, BRL, KRW and INR account for 49% of the global NDF market. But Pfeiffer says that when trading the less liquid currencies, firms need to carefully consider how much they’re trading and how quickly they’re trying to execute, regardless of whether they’re using an algo or not.
“When there’s less liquidity in a currency, you’re not going go in with a huge order trying to get it done quickly, otherwise you’ll move the market, whether you’re trading voice or algorithm. So our clients adjust the size of the trade and the rate that they’re trading according to the liquidity profile of the NDF,” he says.”
Commenting on the decision to extend Pragma360 to include NDF products, David Mechner, CEO of Pragma, suggests that it could also bring benefits to FX market participants looking to demonstrate adherence to the upcoming Global Code of Conduct.
“The ability for traders to have the same high level control and transparency that they enjoy with a G10, brings significant benefits when trading an NDF. This will be increasingly important in light of the upcoming FX Global Code, which demands greater transparency and best practices in foreign exchange,” he says.