Courtesy of Mary Schroeder, TRADERSmagazine.com
MarketsMuse Editor Note: Although the following story profiles the algo revolution taking place within the FX market, those buysiders (and sell-side firms) utilizing algorithms for listed stocks, ETFs and options should find it easy to read in-between the lines–key word “conflict of interest.”
Big brokers began offering foreign exchange trading algorithms five years ago, and now all of the major players have an offering. Now a vendor is hoping to upend the status quo with a suite of algorithms it claims will offer a better execution.
“We are an independent provider of trading technology and there’s a greater awareness these days in the FX market about existing algo providers who are generally dealer banks with a principal interest,” said David Mechner, chief executive at Pragma, historically a vendor of equities algorithms. “Their P&L is in direct conflict with that of the client.”
Mechner argues that banks may favor their own liquidity pools when handling customer orders and that may work to the disadvantage of the customer. “It’s an obvious conflict of interest,” he added. “A lot of the algo offerings that the banks provide explicitly trade into their own stream. Some of them are mixed where they may or may not. Some will mainly trade on ECNs, but there’s a clear awareness that there’s a role that an independent firm can fill there.”
Foreign exchange algorithms, like their cousins in the equity market, break up a large block trade and feed it piecemeal into the market place over time. In the FX world, the algos are succeeding point-and-click aggregation technology that simply gives the buyside access to a big pool of liquidity that might include ECNs as well as dealers. They are point-and-click mechanisms much like the old direct market access platforms of the traditional equities world. FOR THE ENTIRE STORY FROM TRADERSMAGAZINE, PLEASE CLICK HERE