Dr Jamie Walton
Dr Jamie Walton

The Siren FX 4pm benchmark

Dr Jamie Walton, co-founder of Raidne the independent quantitative FX surveillance firm, spoke to e-Forex about its new Siren FX 4pm benchmark.

Why did you decide to set up the Siren FX benchmark and how is it administered? 

The idea first presented itself in a meeting with a senior Bank of England official when he asked: “we wonder why, given the unfortunate tarnishing of the legacy 4pm fix with the 2014 FX rigging scandal, no viable commercial alternative has been offered to the market?” This valid question amplified what we already knew about the market and confirmed that senior banking regulators are still concerned about this benchmark. It established that the industry needed a more transparent, fairer benchmark that was harder to manipulate, and simpler for banks to trade while also protecting investors interests. 

In fact, the industry was not looking for an alternative, it was looking for an option that was fit for purpose. The Refinitiv WMR rate is useful as a source for FX rates to make valuation and investment comparisons. But it was never designed to be a dealing rate. We knew that with our in-house experience of the industry that this was a challenge we could take on. 

Siren has been deliberately designed for execution with special characteristics purposefully built in that take account of the end-user’s priorities. But meanwhile, banks can deliver the rates with minimum risk and slippage – even with the increased 20 minute window.

For administration of the benchmark, we partner with New Change FX (NCFX) which is regulated and approved under the FCA benchmark regime to administer Siren. The data is available to the buy-side for free and can be accessed via a free client login. Siren is available to banks for execution via a licensing agreement from Raidne; it is deliberately simple and low – $1 per $1,000,000 dealt. 

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How is the benchmark constructed and when is it available? 

The Siren benchmark uses a 20 minute window as opposed to the WMR 5 minute window. In addition, the use of an “optimal execution algorithm” which starts with tranches of smaller sized trades, makes it more complex for speculators to identify the trading signals generated by benchmark related activity. It is available every half hour, for the full trading week - the opening of the New Zealand stock exchange on Monday morning, through to the close of New York stock exchange on Friday evening (effectively from 10pm Sunday evening GMT through to 10pm Friday evening GMT). 

How have you engineered the benchmark to reduce excess market impact over the fixing window?

WMR suffers from excess market impact because there is too much trading to be absorbed in such a small window of time. Siren solves this problem by lengthening the window to 20 minutes. Historically this might have been seen as problematic by banks due to the potential for increased tracking error but the Raidne alternative mitigates that risk by enabling banks to use a one second update feed from New Change FX. This allows banks to track the point to which the benchmark is converging. By reducing tracking error, banks may be able to be pass this on to investors in terms of lower fees. 

The “optimal execution on close” algorithm allows predetermined weights to be applied in the 20 minute window so the methodology used to calculate the benchmark is clear and unambiguous. Also, while the WMR takes prices from just three published venues (primarily Reuters), the New Change pricing feed derives its FCA approved and regulated independent mid rate, upon which Siren is based from over 10 venues. This means that, combined with the 20 minute window, it is significantly harder to manipulate. And ultimately it can offer far greater defence at the finish line.

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In what ways does Siren FX help the buyside to meet some of the requirements of the FX Global Code and address some of the problem areas associated with it for these firms? 

Principle 9 of the FX Global Code clearly states that market participants should regularly review the quality of their FX execution. As Siren is a new FX benchmark, clearly any company who is an adherent to the code ought to, at the very least, ascertain whether Siren could offer reduced FX execution costs for each fund an asset manager looks after. It is free to conduct this Siren study with Raidne, we have developed a spreadsheet tool for this purpose. 

Only 5 simple data points are required to run the tool: trade date, currency pair, customer direction (buy/sell), currency and amount of trade. In terms of problem areas in the FX code, Principle 10 allows a bank to pre-hedge a benchmark if they believe that trying to execute the entire order within the benchmark window might create negative market impact. Pre-hedging often has the unfortunate consequence of pushing prices away from most participants due to natural market forces, meaning most investors frequently receive worse fills. Siren mitigates that problem by allowing investors to explicitly participate in that pre-hedging, by including spot weights in the pre-hedging window so they benefit from those better earlier prices. The ‘licensing fee to use’ structure offers a more transparent way to measure the cost of execution. It is also very simple to run transaction cost analysis over the Siren benchmark because the methodology used to calculate the benchmark is published and unambiguous. 

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What sort of savings do your results show could be made by Pension Funds and Asset Managers by trading with Siren FX? 

So far, Raidne has conducted 21 studies for various funds globally. These studies show that the fund’s correlation to the directional flow of the fix ranges from 56% through to 82%. At the low end, the savings demonstrated are in the hundreds of thousands of dollars savings, at the high end this equates to millions of dollars in savings. 

The highest saving we have seen so far is close to $20M in one month, with a near $3M saving in one trade. The results indicate that most funds will receive a hedging cost reduction by switching to Siren. Siren does not necessarily provide a benefit on every single trade but does so most of the time so on average, after a whole year’s trading, Siren is offering reduced FX execution for most funds. 

How easy is it for Asset Managers to analyse and determine which of their clients will benefit from switching to Siren? 

This can be achieved easily using our free tool (as mentioned earlier). It needs just 5 simple data points for each benchmark trade and will arm the asset manager with solid information enabling decisions to be made based on historic data. 

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What response have you had to the launch of the Siren FX benchmark so far and in what ways do you think it may lead to further improvements in FX execution performance?

We have had an excellent response from many market participants. Siren has been welcomed by banks following the WMR FX rigging controversy. Widely viewed as a ‘blemish’ on the industry, the collusion forced banks to implement new operating models that have led to significant regulatory risk from providing WMR services. Siren offers banks a more rounded, honest view because using it creates a route to charging a fair and transparent fee. And because it simultaneously minimises tracking error by accessing the one second update feed. A leading industry figure’s response after reading the Siren white paper was: “Brilliant. it solves a major problem that has been a headache for many for a long time.” 

Forward thinking asset managers have also embraced the benchmark alternative with enthusiasm and will certainly pull ahead of any of their peers who are reticent to review and offer investors savings. For some, this will be a differentiator that allows them to win mandates from asset managers who find adapting and overcoming inertia more challenging. Crucially, Siren has already revealed the reality of this area of the market. The results we have seen to date serve to identify the hidden cost of market impact (still not understood in full by many buy-side players). 

Notably, for some clients the only cost measured for transactions is the spread cost, which is surprising when you consider that market impact costs can be many multiples greater. Siren also has the capability to put the spotlight on transaction cost analysis companies. Those who analyse benchmark execution, without using an alternative benchmark for comparative purposes, face being viewed similarly to people who mark their own exam papers in that they tend to typically get much better results than by having an independent check. All of this bodes very well for the investors, and for those innovative asset managers who are keen to be on the front foot, comply with the law and do the right thing for their clients.