Publications
Estimating Expected Cost - Large Trade Size
In our latest publication, we address the challenge of predicting expected spread costs for FX trades exceeding 100 million. The task of estimating the costs associated with such substantial trades is an industry-wide challenge, primarily due to the scarcity of large trade data. Traditionally, voice traders were asked with making these cost estimations, a method that often leaned more towards intuition than statistical analysis.
BestX, recognizing the inherent limitations of this traditional approach, has pioneered a novel method to tackle the problem. We've incorporated the widely-recognized ReLU (Rectified Linear Unit) function as a foundation to model these costs with increased precision. To ensure our clients are fully informed, BestX provides both an written paper and a video presentation outlining the rationale and mechanics of our innovative model.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
The Implicit Cost of Algo forward rolls
A balancing act between operational/accounting costs and spread costs
In the newest mini paper to our BestX Empirical Statistics of FX Algorithm Series, we highlight the hidden costs associated with Algo forward roll. The well-recognized premium attached to the Algo forward roll stems from its lack of competitiveness compared to booking a competitive swap elsewhere. This, however, constitutes a balancing act between operational/accounting costs and spread costs. The purpose of this paper is to numerically represent this difference, enabling users to reevaluate the situation and make well-informed decisions.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Empirical Statistics of FX Algorithms
We would like to introduce BestX® Empirical Statistics of FX Algorithm Series where we showcase concise and insightful information pertaining to FX algorithms. We will include topics such as algo execution speed, cost of algo forward rolls and other relevant statistics. In Part 1 of the series, our research sheds light on the average execution duration of algorithms across various currency groups - G10, EM and NDF; trade sizes and algo styles. This may be used as a guideline when setting the urgency parameter of an algo. Execution performances of algos also depend on market conditions, available liquidity, market volatility and the specific needs and constraints of the traders.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Banking Crisis and Its Impact On Market Liquidity
In this paper, we examine bank failures' impact on market liquidity. We also introduce a systematic approach to quantify and measure liquidity shock induced by the failure of a liquidity provider. The magnitude of recent bank failures sparked financial contagion fear. Total assets of Silicon Valley Bank and Signature Bank was US$319 billion or 85% of the total assets of the failed banks during the Global Financial Crisis of 2008.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Do limits improve algo performance?
In algorithmic execution, the price limit serves as the stopping criterion. The algorithm halts execution once the price exceeds this limit, enabling users to control FX algorithm execution risks. However, users have no standard guidelines to set up the optimum price limit.
Two potential scenarios arise:
If the price limit is set too far away, it will never be triggered, offering no price protection.
If the price limit is set too close, it will be activated frequently, leading to a higher risk of incomplete execution.
To tackle this challenge, our recent study transforms the optimum price limit problem into an optimal control model. Instead of relying on numerical solutions, the BestX team employs a statistical method based on a unique dataset from BestX. We hope our paper's insight will guide clients in setting the optimum price limit for each algo style.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Internal vs. External: An optimum trading framework based on BestX Total Cost
We introduced the Algo Center of Mass (CoM) concept in our previous paper. In this paper we now use CoM as an effective tool to derive optimum trading based on 'BestX Total Cost’ framework (see section 2 for more information). Price signature, or information leakage, is different between venues; therefore, there is a need to establish a framework to balance the trade-off between capturing spread and information leakage. In the first section, we present different price signatures across various platforms and then derive optimum trading based on the BestX Total Cost framework. In the last section, we review the statistics of algos widely used by investors.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Algo Execution Path and Momentum Timing - Center of Mass
In this paper, we introduce the Center of Mass as a metric to summarize the loading path of an execution algorithm and evaluate the algo’s momentum timing capability. Algorithms distribute fills based on several factors. Market condition forecasts, including momentum, volatility, spread and liquidity, and benchmarks, dictate how fast and aggressive or slow and passive an algo behaves. A simple TWAP algorithm executes at a constant rate. In contrast, a more complicated opportunistic algorithm may capitalize on market liquidity, change execution speed according to short-term momentum forecast, and fill a larger portion of an order in a shorter time. The opportunistic algo may also detect unfavourable conditions and execute less aggressively. These behaviour changes may lead to different outcomes, and it is crucial to understand what is happening ‘under the hood' and how this can affect performance.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
Optimal Panel Size for Fixed Income Trading
A recent publication of the BestX Research Team examined the optimal panel size for FX trading. In this paper, we extend this analysis to fixed income instruments. Intuitively, a large panel size may induce competition and help to minimize transaction costs.
However, a large panel size may also increase the probability of information leakage, i.e. counterparties in the panel may use the information gleaned from their participation to adversely move the market. In this paper, we examine the optimal panel size when trading fixed income instruments subject to this trade-off between execution cost and information leakage.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
The Good, The Bad and the Ugly of Custodian FX
This article provides the practical case study for the usage of the BestX analytics platform, this time turning attention to Custodian FX data. The intention is to help our clients understand how we are simplifying workflows for oversight and corporate governance, whilst addressing some misconceptions and highlighting existing problems.
Which Custodian FX data feeds we have automated (including timestamps)
How this helps our clients with oversight
Peer analysis for Custodian FX
What the remaining challenges are
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
BestX Fixed Income Compass
The Fixed income universe is rich in breadth and depth -it has millions of active instruments with trillions of AUM. It is crucial for traders/PMs not only to achieve the desired risk/return profile but also to minimize execution costs.
The BestX team has developed the BestX® Fixed Income Compass using the bayesian gaussian mixture model to help clients navigate the myriad of fixed-income instruments.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
The impact of SA-CCR on FX Swap Trading
US banks adopted the standardized approach for counterparty credit risk (SA-CCR) mandates on January 1, 2022. We saw a divergence of normalized spread for short-term swaps with less than 1-year tenor between the US banks and their European counterparts beginning January 2022. The normalized spread for US banks was 0.1 bps (0.2 bps in bid-ask spread) wider than their European peers and this is may be driven by the stringent regulatory capital requirements of SA-CCR.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.
BestX Fixed Income Volume Model
Trading volume is an important indication of market activity. In the equity world, traders use daily, weekly or monthly average volume to estimate relative volume executed. The average daily volume (ADV) calculation is straightforward; however, it does rely on access to volume data - may it be directly from exchanges, venues or market data vendors. In the fixed income space, trading data may not be readily available and this poses a challenge to estimate volume and as a result ADV is less frequently used. To help tackle this problem, BestX introduces a model to help estimate fixed income volume. Users may use this model to calculate the probability to complete an order for a fixed income instrument within a 1-day period or estimate volume distribution for a fixed income instrument over the course of an entire trading interval.
Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper, which is also hosted within our FAQ section of the UI.