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Profit & Loss: Sophisticated Data Analytics To Democratise The Foreign Exchange Market

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Sophisticated data analytics for trade execution have long been the preserve of the largest banks, Colin Lambert takes a look at a new product seeking to extend the benefits beyond that group.

One of the bigger trends in the FX industry in recent years has been an increased focus on execution quality. From agency services, through the dedicated execution desks on the buy side there has been greater scrutiny as well as a desire to better understand how their flow impacts the market.

More often than ever before, execution traders are being asked by internal and external oversight functions about the rationale for an execution style, often months after the event. The most efficient way to meet this compliance requirement is through the use – and storage – of data analytics, but to achieve this, first the firm concerned has to have access to, and being able to analyse, the relevant data.

This increased focus on execution quality has not been industry-wide, however, predominantly these analytics packages have been used by top end banks and some (but by no means all) of the larger, more sophisticated asset managers. Beyond those groups the challenge of cost or complexity (or both) has limited access and the willingness to engage with the data.

Financial technology provider MahiFX is seeking to redress the balance however, with the launch of MFX Echo, a trade analysis, liquidity visualisation and price-explain tool enabling traders to evaluate markets, decide on how to work orders and analyse performance during and post execution.

By launching the new service, David Cooney, co-founder and CEO of MahiFX, says the company is seeking to expand the benefits of transparency and deeper market data to all areas of the market.

“Traders need information that they can understand and easily interact with, MFX Echo allows the trader to decide or nuance their style of execution and interact with an order during execution. Traders need to engage with their executions and tools like this, that are intuitive and can take control of the often onerous processes of cancel and replace for example, allow them to do so.”

“Historically, this level of granularity wasn’t widely available, but it is now, and as such traders are better able to understand their quality of execution, it is more than just a TCA tool, the liquidity visualisation and spread analysis tools allow traders to identify sweeps in the market, thus helping them better time their executions.”

As is often the case in the banking world particularly, the genesis of Echo was in technology that MahiFX was using internally. James Furness, CTO at the firm says that while it was using the data analytics to run Compass, its pricing and risk management platform, as well as Vector, its algorithmic execution tool, it did not have a dedicated product for use by clients. “We started by building the “Firehose”, a robust streaming mechanism to safely and securely extract all the available tick data from all of our customers’ trading systems,” he explains. “The service is built on Amazon Web Services cloud technology, which has vast storage and processing capacity, this means we can collate and process the data without impacting on the trading process. Echo is our front end screen that presents the data and analytics.”



The GUI has several looks, presenting graphical data of the child orders (and rejected trades) within a parent order, minimum/maximum spreads and liquidity levels during the execution, users are also able to drill down at any time into the details of the execution to see how the strategy worked on different venues, as well as how the market reacted to the trading activity. Users are also able to zoom in on certain windows during the execution to better understand market behaviour and it is here that the ability to identify sweeps stands out. “Sweeps can be highly impactful,” says Cooney. “By being able to identify them, traders are able to adjust their execution style – for example they can see the sweep occurring and step back to avoid chasing the market away.

“This offers a good graphical representation of the psychology of the market, It highlights skews as well as sweeps so traders can dial the aggression up or down accordingly – it gives them a great window into the market.”


Echo also displays other data such as time to trade/time to cancel, the stats on aggressive or passive executions, as well as a yield profile. Furness says development work is advanced on adding this analysis at system level, rather just for individual trades. Analysis is also available by market time zones, but unlike many other trade analytical tools that look at this issue geographically (i.e. Asia, Europe and the Americas), Echo breaks the trading day down into buckets, such as Asia, Asia/Europe, Europe, Europe/US, US and Roll (typically the end of the US trading day when the value date changes), thus allowing traders to better align their analysis with more granular data from specific times of day.

Users are able to analyse their spreads using peer comparison statistics to see how they are performing as a market maker, “This data is particularly useful for a market maker seeking to be engaged by a client,” suggests Cooney. “It allows them to empirically show their performance to a prospective client, which should help build a strong and durable relationship.”


Enhanced Execution

MFX Echo is, according to Cooney, “highly complementary” to the firm’s Vector product, its algo execution command centre. He is also keen to stress that Vector has itself evolved, thanks to the data now being provided in Echo to clients. “Vector really started out as a passive execution strategy that was aimed at allowing clients to capture more spread,” he explains. “Our data analysis saw us realise we could add further value to the execution process by – as one example – simply looking at the spread distribution. The data showed this was regularly around the 0.1/0.2 area, so what is the point in aggressing at 0.5 or 0.6 wide?

“With this knowledge we were able to develop new strategies that leveraged this data by helping users better select the time horizon for their executions. We show the glide path of an expected execution so if a client sees they are behind that curve they can dial up the aggression.”

Each user can have tailored tools for different levels of aggression across individual currency pairs or venues and limit price tolerances are built in at which orders can be “filled and killed” – users can at any time override the execution to close out the parent order at market.

New order types have been created for Vector, a Dynamic Time Algorithm (DTA) is time bound and the Dynamic Price Algorithm (DPA) optimises market intelligence to minimise the spread paid by aligning the level of aggressiveness with market direction. The firm also now offers Limit Orders, a DMA solution where the client chooses the venues on which the orders are placed, as well as the Adaptive Aggressive Strategy.

Cooney says the DPA strategy was initially specifically aimed at helping buy side clients execute at benchmark fixes such as the WM Reuters 4pm London Fix, but has since evolved further. “We analysed the execution styles of several buy side firms around the Fix, and we were able to largely replicate that,” says Cooney. “Generally speaking, they would pre-hedge 25% of the order in the 10 minutes before the Fix, execute 50% in the five minute window, and then the balance in the 10 minutes after the Fix.

“We developed the DPA to allow them to retain this strategy but also ensure the market didn’t go too far in either direction,” he continues. “The challenge for the buy side trader is often they are benchmarked to arrival mid and if the market runs away from them they get yelled at because it costs the PM money, and if the market goes too far in their favour they get yelled at because the PM thinks they are taking too much risk. With the DPA they can dial up participation if the market is moving their way but at the same time not chase the market up if it goes against them.

“Around these strategies we have also rolled out services like Cannon, which allows a client to execute a chunk of their order immediately and then take their time over the balance – it offers them a degree of comfort,” he adds.

The enhancement of Vector and launch of Echo are part of a drive at MahiFX to effectively democratise the foreign exchange market. Cooney is keen to stress the cost-effective nature of the firm’s services just as much as their sophistication. “A healthy market requires a broad spread of participants and these participants need to be well-informed,” he says. “Echo is a natural evolution of our offering, it allows clients to demonstrate best execution as well as see the story of their execution, and then use the experience to inform future trades.”

Written by Colin Lambert, Editor at Profit & Loss Magazine.



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