Pragma Securities, a leading provider of high performance algorithmic trading tools, has launched a sophisticated algorithm designed to improve average execution performance against the daily 4pm WM/Reuters foreign exchange benchmark fixing.
Following recommendations from regulators in the wake of the FX rate-rigging scandal, in February 2015 the methodology underpinning the WM/R benchmark was changed, widening the calculation window from one minute for the most liquid currencies to five minutes.
In addition, banks have largely shifted their execution of customer fix orders from the spot desk to their electronic desks, where time-weighted average price (TWAP) execution algorithms are often used.
Pragma’s research highlights that together, these changes have created predictable patterns that can be leveraged to improve trading performance using only publicly available data. The full research findings are available via the Pragma Securities website.
Pragma’s new SmartFIX algorithm is built on the firm’s own research, which has identified predictable patterns of trading behaviour around the key FX benchmark.
The algorithm observes only publicly available information, and adjusts its trading rate in a systematic way based on those observations to achieve better execution on average for traders benchmarked to the Fix. In addition, these dynamic adjustments are layered on top of a proprietary trading schedule that achieves lower tracking error against the benchmark than a simple TWAP
David Mechner, CEO at Pragma Securities comments: “For traders that are constrained to match the fixing rate, our algorithm can reduce risk relative to a simple TWAP, and can also improve execution quality for a modest increase in risk. This makes it a good tool for banks servicing customer fix orders whether in a principal or agency manner.”
The new algorithm complements Pragma’s existing foreign exchange platform offering, Pragma360, which includes a suite of execution algorithms, transaction cost analysis (TCA), risk controls, and a next-generation algorithm monitoring system called Panorama. Pragma360 is provided as a broker-neutral trading solution to banks and asset managers.