High-Performance FX Algorithms
If you use algorithms provided by banks, you’re leaving a lot on the table. First, bank algorithms don’t access liquidity from competing banks, thus trading at much higher spreads. Second, by routing your large FX order to a bank algorithm, you leak more information than required to an entity that is also trading as a principal.
BestEx Research FX algorithms are independent and designed to solve these unique challenges in FX market structure. Our algorithms get streaming liquidity directly from the banks and liquidity providers customized for you. Since they know that they are streaming liquidity directly to our algorithm on your behalf and are competing with each other, you’ll get the tightest possible spreads.
What does “high-performance” really mean?
We optimize every aspect of execution for each instrument’s market structure—trade planning, short-term price prediction, order placement, and order routing. Each child order our algorithms place or cancel—size, price, and venue—is based on a rigorous quantitative framework, backtested and re-optimized over thousands of simulations.
Take a deep dive into our algorithm design
Problem
Since dealers and ECNs don’t make trade size data available, most algorithms have no knowledge of the intraday liquidity distribution of the pairs being traded. But an intraday volume distribution is critical to any algorithm aiming to minimize market impact.
The image above shows a typical TWAP (time-weighted average price) trading style, with executions fixed over the entire order duration. Even though elements of the market like volume are evolving throughout the trading day, most algorithms are using TWAP because intraday volume is hard to estimate without a consolidated tape.
Solution
We estimate the volume distribution of each pair from historical limit order book spreads and depths and reduce your impact by trading in a VWAP style.
This illustration shows our estimated volume distribution (gray), generated from historical and real-time liquidity conditions like spread (green) and tick volatility (blue). With our estimated volume distribution, BestEx Research reduces impact costs by trading in proportion to expected volume rather than using a TWAP strategy.
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Problem
If you’re using bank algorithms, you’re likely paying higher spreads. Banks are competing with other liquidity providers who have no incentive to offer them liquidity at tight spreads. In addition, large banks often do not provide liquidity to each other because they want to provide it to you directly.
Quotes to buy and sell USD / JPY from a variety of dealers and ECNs. BestEx will aggregate custom quotes on your behalf, choosing the effective “BBO” (highlighted here in dark blue). Spreads are tightened as a result, reducing overall spread costs.
Solution
We are connected to the majority of dealers and liquidity providers and give them the opportunity to stream liquidity customized for you. We’ll also provide a dealer scorecard so you can give them feedback, force competition, and yield the tightest possible spreads for your trading.
Quotes to buy and sell USD / JPY from a variety of dealers and ECNs. BestEx will aggregate custom quotes on your behalf, choosing the effective “BBO” (highlighted here in dark blue). Spreads are tightened as a result, reducing overall spread costs.
Want to know exactly how it works? Contact Us
Problem
Most algorithms use simple heuristics to decide when to place orders and at what price, leading to high spread costs, especially in less liquid pairs.
The illustration above shows how BestEx Research algorithms calculate appropriate limit prices for each new child order deployed.
Solution
The heart of our algorithms is our multi-step fill probability model that prices each limit order as an option based on historical and real-time liquidity characteristics of the pair you’re trading, yielding higher spread savings. And it doesn’t matter whether you’re using a VWAP strategy or any other algorithm we offer.
The illustration above shows how BestEx Research algorithms calculate appropriate limit prices for each new child order deployed.
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Problem
Most algorithms use aggressive logic only to catch up on a trade plan without accounting for varying depth and spread, resulting in higher costs for taking liquidity.
This image illustrates spreads widening and narrowing throughout the trading day. Overly simplistic aggressive logic executes market orders instantly as needed to get back on schedule, risking execution when spreads are at their widest and yielding high spread costs.
Solution
Our algorithms monitor every quote change and utilize forecasts of spread, depth, and short-term alpha to take liquidity opportunistically, significantly minimizing your spread costs and temporary market impact.
BestEx Research forecasts spreads and depth to decide whether waiting to take will reduce spread costs. If spreads are likely to tighten, we’ll wait to take liquidity when the time is right, creating substantial savings.
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Problem
While passive orders earn spread, they also tend to fill when prices are moving in your favor. Improved prices after your fills are referred to as “adverse selection” and the cost of adverse selection can be much higher than a half spread.
The price of this currency pair is moving down over time. This example shows adverse selection costs exceeding spread costs; prices are declining rapidly during your buy order, by more than the size of the quoted half spread.
Solution
Our algorithms do what market makers do, canceling limit orders when our proprietary short-term alpha model points to a high probability that the price will move in your favor.
This illustration shows limit orders to buy and sell in the limit order book at an ECN. Our short-term alpha model detects the thinning liquidity at the BBO and below, and our algorithms will cancel those orders and replace with new limit orders deeper in the order book.
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Images and information contained within are intended for illustration purposes and do not represent a promise of future performance.
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