FX Algos – a proposed taxonomy

Style is a simple way of saying complicated things
Jean Cocteau

A common request from many of our clients over recent months has been to categorise algo products into a number of different styles. This is far from straightforward given the plethora of algo products now available (in BestX alone we have now seen 113 different algos across many providers), and also due to the fact that the market, and product innovation, continues to evolve rapidly. Given this breadth and complexity, it is probably pragmatic to start with a reasonably simplistic taxonomy of styles, which can always be refined over time. In this short article we introduce our initial family of algo styles based on a number of discussions with our clients.

To kick off, we are proposing 4 key algo styles, summarised in the diagram below, which stem from the initial key objective: is the algo attempting to achieve a specific benchmark or not?

For non-benchmark algos, we have suggested 2 style groups:

1.       Get Done
2.       Opportunistic

Whereas for algos that are designed to minimise specific benchmark slippage, we have suggested an additional 2 style groups:

3.       Interval Based
4.       Volume Based

In addition, for each algo there are additional attributes that can be used to describe behaviour:

1)      Limit – whether the algo had a limit price applied to it or not, and,

2)      Urgency – a data field describing the urgency, or aggressiveness, of the algo. There are many different forms of Urgency used in the market, so to simplify, we are condensing into 3 values: Low, Medium or High

The additional attributes are important to allow an apples vs apples comparison, for example comparing a sample of algos within a category where some have hit limits and others have not could pollute the performance results. Equally, if you were analysing a group of Opportunistic algos, it would be preferable to stratify the sample into groups with similar Urgency settings.

Going into these 4 categories in a little more depth:

1.       Get Done – this family of algos is expected to include more aggressive algo types where the priority is less on minimising market impact or earning spread, but more focused on getting a specific amount of risk executed as quickly and efficiently as possible. Many providers offer products that are named ‘Get Done’.

2.       Opportunistic – this group is anticipated to include an array of products, that don’t have a specific benchmark they are looking to achieve. Algos falling within this group are expected to include the array of products in the market that are seeking to maximise spread capture, unencumbered by a strict schedule dictated by a benchmark. Urgency is often a key parameter within this style, determining how passive the algo is prepared to be in order to earn spread.

3.       Interval Based – this group includes all algos that are attempting to minimise slippage to a benchmark where the algo slices the parent notional according to an interval, or time, based schedule. So, for example, this group would include all TWAP algos, the most commonly used algo within the FX market currently.

4.       Volume Based – we anticipate this group to be the most sparsely populated given the largely OTC market structure of FX. Products such ‘Percentage of Volume’ or ‘POV’ would fall within this style, which are algos attempting to execute in line with a specified % of volume traded within the market. This algo style has been adopted from the listed markets, where it is obviously easier to target a % volume target given the availability of volume data. In FX, any target will be approximate given the inexact nature of total volumes traded at any given point. VWAP, or Volume Weighted Average Price, algos would also fall within this style, but again, they are less common in FX given the difficulties in measuring actual volumes.

The proposed taxonomy is, by construct, a simplification of a complex ecosystem of algos, which will result in compromises to be made when categorising products. Hopefully, the additional Limit and Urgency fields, will help with the grouping to some extent. The objective of this exercise was to propose something simple, pragmatic and understandable, whilst trying to provide a decent representation of the current algo product array. The Algo Style field will be going live within the next BestX release. We recognise this is likely to be an iterative process, but we felt it was important to respond to client demand and take the initiative. We do not seek to impose our view on the market, but as always hope for feedback, and expect that this concept will continue to evolve over time as we seek to represent the majority view in the market