Achieving FX Excellence: Agile and Highly Customized Automation Required to Handle FX Trading and Risk
It’s just over a year since financial markets crashed. There are lessons to be learned from the bright spots too, such as the performance of foreign exchange (FX) as an asset class. Necessity has been the mother of invention in the FX community, consistently driving its participants and solution providers - such as Apama - to excellence.
Consider the drivers. Volume continues to grow as usual, driven by automated trading and the increase in market participants in general. But the market is also increasingly dynamic. Our customers told us that the markets became “irrational” when volatility spiked significantly last September; it now remains higher than previous year’s levels. Next, liquidity remains fragmented as before, across multiple platforms. Consolidating that liquidity to gain the “bird’s-eye” view as a basis for automated trading and hedging is a non-trivial task in fast-moving markets. Resilience is a related issue, since platforms that are still reliant on a single source will risk significant disruption during the loss of pricing information. And spreads are driven by volume and volatility, balancing the risk of not filling orders at offered prices with providing attractive pricing.
So what are more innovative institutions doing with FX now? High frequency trading systems and their strategies are becoming more complex, in a market where the average lifespan of an algorithm can be just a few months. Algorithms programmed to take advantage of the increased volatility did make money during the recent period, and many buy-side firms increased their volume of algorithmic trading in FX to catch new opportunities. Proprietary trading firms, for instance, have been writing statistical arbitrage algorithms to spot and execute on fleeting opportunities. Other funds entered the FX arena from equities soon after the onset of the crisis because of the short-term opportunities to capitalize on volatility.
But under these conditions, positions can be built in milliseconds. Given that, measuring risk at the end of the day is no longer sufficient when you risk losing a significant percentage of the value in your firm in a single trading session. In response to sell-side risk, for instance, we have seen algorithms that internalize FX flow, taking positions in currency pairs and then hedging those positions in real time as incoming orders exceed certain positions. The aim in this case is to retain risk neutrality and free up the spot traders to focus on the larger value deals rather than spending time on complex hedging activity.
Therefore, we firmly believe that it will take both agile and highly customized automation to handle the new market norms in FX trading and risk. To quote one Apama customer, “The old methods don’t work anymore.” Our observation from our FX customer deployments is that their individual use cases, though highly customized, are all real-time and event-based, and build on FX aggregation as a foundation. This month’s newsletter touches on this trend, in which a number of leading institutions have extended the Apama platform beyond aggregation and into other areas such as algorithmic trading, market making and risk management to gain an edge in FX trading. For more information, about the Apama platform’s capabilities in FX, click here.
