Justyn Trenner Principal at Client Knowledge
Justyn Trenner Principal at Client Knowledge

Developing smarter risk and liquidity management algos for the FX sell-side

ClientKnowledge research among some 600 real money and leveraged investors in the summer of 2008 showed a significant switch away from algorithmic fund management approaches, and away from pure FX alpha funds towards overlay programs (see Fig 1). At a time when banks are running scared of poorly understood exposures, how can this be the time to advocate more algos in sell-side dealing rooms?

Data, data and data Well, the short answer is, it’s about the data. First, many sell-side firms recognise their decreasing value-retention (expressed in terms of basis points of client flow traded – a key metric and if you don’t know it or can’t calculate it, you already have an issue to address). We have worked with a significant number of banks, from all parts of the world, typically, although not exclusively, leading players within their region. Many have a feel for this metric (and it is not comfortable) but still have poor data collection and even poorer reporting. Once we apply various techniques to clean the data and make reasonably accurate estimates, we often discover uncomfortable truths – sales mark-up reduced by poor prices from trading, poor value retention through inefficient workflows and even that the bank would make more money by picking their clients and their traders – and trading counterparties – better. Every year...continued

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