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Foreign Exchange

BNP Paribas launches third-generation FX execution algorithms

BNP Paribas has launched Cortex iX, which it believes is the first suite of third-generation FX execution algorithms to be offered to the market.

Cortex iX is available through Cortex, BNP''s single-dealer platform that it launched in March, as well as through other outlets. The bank believes that Cortex iX, which stands for intelligent execution, will gain traction with the corporate sector, which has become the biggest adopter of execution algos in recent years as it becomes more advanced in how it transacts it FX business.

"We are finding corporates are becoming a lot more sophisticated," says Asif Razaq, global head of FX algo execution at BNP Paribas. "They are comfortable taking on market risk when they work an order over a period of time."

He says the new algos also provide corporates, and real-money accounts, with an improved best-execution tool, which has become important as execution requirements have tightened and the focus on transaction cost analysis in the FX market has increased.

 
 Asif Razaq:

"What we are
doing is giving
our algos the
power of sight,
so they can see
what is changing
in the markets."

To facilitate best-execution requirements, the bank gives customers a complete breakdown of all the trades the algo executes to fill an order, and benchmarks it against market statistics.

"We can customize those benchmarks," says Razaq. "The level of detail we provide on our post-trade reports is so detailed it is pretty much auditable."

Razaq believes the algos, which BNP built from scratch purely for FX rather than adapting an equity strategy like some other banks, are a step up from the second-generation algos that dominate the market.

"We believe we are the first bank to introduce third-generation algorithms into the market," he says.

A new generation

According to Razaq, the problem with second-generation algos is they work to a predefined set of rules and therefore cannot adapt to changing conditions in the market. In addition, he says, their rigid way of execution leaves a pattern in the market. That leaves second-generation algos prey to hedge funds that have pattern-recognition algos, which can push the market to the detriment of the client.

Razaq says BNP has therefore given its new algos adaptive technology, allowing them to take market conditions into account and execute orders under the radar of other market participants.

"What we are doing is giving our algos the power of sight, so they can see what is changing in the markets. This enables them to map out their path of execution and adapt their logic in a very dynamic market."

As well as being adaptive, the bank has also put an extensive amount of random logic into its algos. That means they do not leave a digital footprint, so the market cannot recognize if there is a big order going through, says Razaq.

There are just three algos in the Cortex iX product suite, given that they adapt their style to conditions in the market.

Chameleon, as its name suggests, is designed to blend into the market, with the objective of getting the client filled on the passive side of the price, while not moving the market against the client.

Viper is a more aggressive strategy for clients wishing to get their order filled quicker. It is not allowed to drive the market against the client, but is allowed to pay spread to achieve faster execution.

Floating Viper, which is still an aggressive strategy, is allowed to work on both sides of the market.

BNP also offers a service called Flex, which will modify the algos to a customer''s specific requirements.

Razaq is keen to emphasize that Cortex iX gives customers control over the execution, which is crucial in overcoming worries that surrounded algos in the past that clients would hit a button and hope for the best.

Speed parameters can be adjusted, while the system shows clients what trades the algo is executing in real time. Clients can also pause, restart or abandon their orders at any stage.

"If we are expecting clients to take market risk, it''s absolutely imperative we give them full control of the execution," says Razaq.

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