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Carillion collapse shines spotlight on late payments issue

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The collapse of construction giant Carillion has focused media and government attention on the global issue of payment terms after it was discovered the group paid subcontractors with a 120-day delay. These delayed payments meant many suppliers had to resort to expensive bank finance to stay in business while others are now facing bankruptcy.

Recognising the importance of ending the culture of late payment, two FTSE 100 chairmen have joined the advisory board of Previse, a UK based company which uses artificial intelligence to solve slow payments for the entire supply chain.

Chairman of supermarket chain J Sainsbury, David Tyler and chairman of property group British Land, John Gildersleeve have joined the company as investors and advisers.

Previse’s AI technology is designed to enable large firms to pay suppliers on the day they receive an invoice. The London-based firm’s technology calculates a buyer’s likelihood of paying an invoice, before deciding which invoices will be paid, so small suppliers can be paid instantly.

David Tyler said: “The length of time it can take for suppliers to be paid hurts not only them, but the large companies buying their products and services as well.” He believes that Previse will bring benefits to the entire supply chain and that the company has a bright future ahead of it.

Mr Gildersleeve, who is also deputy chairman of telecoms company TalkTalk, told the Financial Times that Previse could tackle an issue that has, “infected British business forever.”

Lengthy payment terms and the prevalence of slow payments by large buyers, which affects three in five SME suppliers, cause 50,000 UK SMEs to close each year. Previse’s artificial intelligence technology allows even very small suppliers to receive payment the day they issue their invoice by instantly identifying if an invoice is correct and allowing a funder to pay the supplier immediately based on this information.

“I am proud to be able to welcome our new board members who represent incredible senior experience across such a wide range of industries with significant supply chains.” Said Paul Christensen, CEO of Previse. “I think this shows the deep understanding across industry that slow payments are a real problem, and confidence in our approach to tackling the problem.”

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The potential benefits for corporates in algorithmic trading

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Curtis Pfeiffer, Chief Business Officer at Pragma Securities, explains to FX-MM how corporates could stand to benefit from using algorithms for FX execution.

Why should corporates consider using algorithms for FX execution?

Corporations want to maximise profit, and a penny saved is a penny earned. Algorithmic trading can contribute to the bottom line by significantly reducing FX trading costs. Corporations trade on the order of $70 trillion a year – roughly the same as the total global GDP. On such large amounts, basis points matter.

That’s why, to fulfil their mission, corporate treasurers are increasingly focused on ensuring that they get best execution on their FX transactions, which includes using the best available trading tools and practices.

What advantages do algorithms have over other trading techniques?

With the speed at which trading is conducted today, the proliferation of trading venues, and sheer levels of information that is processed, it is simply impossible for a human trader to stay on top of all the data that the market is generating.

There are four core benefits to algo execution:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Algorithms have the ability to provide liquidity as well as to take prices, allowing patient traders to capture part of the bid-offer spread
  • Automation frees treasurers and traders to focus more of their time on those issues where human intelligence and judgement add the most value.
What factors should investors consider when choosing an FX algorithm?

First, corporations should understand the bank’s liquidity model for their algorithmic offering – principal, agency or hybrid.

Bank algos access liquidity differently depending on the model. A pure principal algo accesses just the host bank’s liquidity, which also provides indirect access to other liquidity pools in the marketplace. Agency models do not interact with the host bank’s liquidity, but are able to provide liquidity on ECNs as well as taking prices, potentially capturing part of the bid-offer spread for the customer.

Hybrid models can offer the best of both worlds, though customers should understand how the bank manages its dual role as principal and agent. Corporations should assess the liquidity pool underlying each bank’s algorithms to determine which model will be most effective.

Second, corporations should be satisfied that their bank provider has first class algorithmic trading tools – either through a major investment it has made in algorithmic trading research and development internally, or by partnering with an algorithmic technology specialist. Smart algos have sophisticated order placement logic, change their behaviour based on pair and time-specific liquidity patterns, and make intelligent and dynamic use of the real-time liquidity available across venues – for example based on order fulfilment rates.

Provided liquidity and investment checks out, corporations can consider algorithmic trading as another service their banks provide, and direct flow as part of the overall banking relationship.

Finally, best practice is to use TCA after the fact to track performance across bank providers and make sure all is as expected.

To read more, please visit the FX-MM website here.