Automation of Currency Trading Is Changing the Corporate Treasury Function

September 18, 2019

As Sibos (the annual banking and financial conference) makes its way to London, the global capital for the foreign exchange (FX market), for the first time, QFinity Lab’s David Moche explores how automation is helping corporate treasurers manage their foreign exchange exposures and ensure alignment with best execution practices.

The structure and make-up of the foreign exchange (FX) market have been transformed over the past 20 years. Once a voice-traded, bank-dominated market, the industry has evolved almost beyond recognition as a result of new technology, greater diversity of counterparties, and innovation in areas such as electronic and algorithmic trading.

The role of the treasurer has also evolved in this period. Treasurers have become increasingly strategic, with a greater focus on solving wider business challenges beyond their traditional remit.

Technology and automation are also having a profound effect. Nearly 75% of treasurers say that their organisations are automating treasury functions in one form or another, and two-thirds expect automation to have some impact on their working lives.

The benefits of automated technology and artificial intelligence (AI) are most prominent when there is a need to process vast amounts of data. Put simply, machines are far superior to humans at high-volume processing. Not only does that improve efficiency and risk management, making a lot of treasury functions easier to manage, but it frees up corporate treasurers to focus on other tasks where they can value.

The view that machines are superior to humans at high-volume processing is certainly true when it comes to managing volatility and hedging foreign exchange exposures. This has always been a complex and challenging task, with all but the largest global corporations either outsourcing this function to banks or relying heavily on them for access to liquidity, execution and market intelligence.

Automating Currency Trading – The Role of Algorithms.

The challenge of managing FX exposures has been exacerbated in recent years by the increased complexity of the market’s structure. There is greater fragmentation of liquidity, as the number of venues and execution models increase and the sheer level of information that needs to be processed almost instantaneously in order to execute a trade, is significantly higher than a few years ago.

Corporate treasurers need the necessary tools to master the trading process and stay on top of all the data that is generated. That’s why many are turning to algorithmic trading, or urging their banks to do so, ensuring they achieve and can demonstrate the best execution while reducing the risks associated with their currency trades.

A high-performing execution algorithm will assess the current market situation and the available sources of liquidity at a given point in time, and make the optimal routing decision without the involvement of a human being.

According to Greenwich Associates, there has been a meaningful increase in both penetration and the proportion of flow that is executed by corporates through algorithms as they seek to optimize their FX trading performance.

A human cannot react as quickly to changing bids and offers across multiple venues as quickly as a computer can. Additionally, since algorithms automate trading, they can process multiple orders simultaneously. This is another important benefit, especially at a time when traders are being asked to do more with less.

58% of FX traders found that algorithms materially reduced overall trading costs, while over a quarter of traders believed algorithms enabled them to spend more time on complex orders.