There was a time when best execution to some on the buy side merely meant calling three or four banks on the telephone, asking each for the same price and hitting the best bid or offer. Indeed some institutions still use this method as their best execution policy.
More recently, however, thanks to events, regulatory interference and the structural changes taking place in the FX market, more ﬁrms are re-assessing their best execution policy.
More buy side ﬁrms are considering the use of algorithmic execution strategiesand tools as part of this process, but even those who aren’t willing to go that next step are re-evaluating their approach to FX markets.
“Signiﬁcant structural changes in the FX market are underway. These changes are the product of broad and deep regulatory reform stemming from the Global Financial Crisis as well as the LIBOR and WM/Reuters ﬁx scandals.” Joe Hoffman, director, equity derivatives and foreign exchange at Russell Investments.
Iskandar Vanblarcum, head of EMEA FX new business at Thomson Reuters agrees that issues surrounding the benchmark ﬁx have played a role in the re-evaluation, he also believes that to be only part of the reason.
“The asset managers know that only a relative few were involved in the ﬁx issue,” he says. “But the revelations around what happened have led to questions from the asset owners and oversight functions over how the managers treat FX. Historically the answer has been as a by-product, but that is changing now.” Iskandar Vanblarcum, head of EMEA FX new business
The headline issues when it comes to reform of markets are conduct and, inevitably, best execution. The re-evaluation that has accompanied these issues has led people to ponder not only how they execute, but where.
“We have seen a surge in adoption of multi-dealer platforms at the expense of the single dealer platforms (SDP),” says Vanblarcum, “There is an understanding on the part of customers that they cannot rely upon an SDP to fulﬁll their enhanced best execution policies.” It’s not just about best execution, however. He continues, “These customers have high volume processing needs when allocating across thousands of accounts, and that requirement is complicated even further when the execution has taken place with multiple liquidity providers. They need a multi-dealer platform that offers workflow efficiencies while allowing them to meet the needs of their best execution policy.”
A fundamental change within the market structure – fragmentation – also represents a challenge to best execution. “Fragmentation is an outcome of fully automated trading, we see it in equities, treasuries and now FX,” says Isaac Lieberman, principal at Aston Capital Management. “The talk in markets is very much about the extreme moves we have seen, but that misses the point that there are little mini moves happening all day long, and this can impact execution quality.”
With the challenges facing market participants inevitably comes innovation. And while some participants are content with how they operate, they also remain open to new ideas, as expressed by Colorado PERA’s Komon:
“While I don’t foresee any substantial changes in our execution process in the near term, we strive to stay informed about developments in the FX marketplace and will implement changes we deem valuable in the future,” he says. “Enhancements we may consider include third-party execution analysis, the use of new platforms or venues, or the incorporation of new data.”
Simon Jones, director at Pierrepoint FX, sums up the challenge:
“The challenge is staying on top of all that is new out there and the many different directions change is coming from. The opportunities right now are limitless, the key is turning those into legitimate commercial realisations people beneﬁt from.”