When placing massive electronic spot foreign exchange transactions through a liquid market in recent days, the focus has been on restricting the market impact to prevent the price from moving away from the customer. To do this, the phenomenon has been to split huge trades into instalments as small as $1 million and to use algorithms to send these trades overtime to cover the presence of a big order across several markets. But while this solution is successful, it is not ideal for everyone. "The market forced customers to cut trades into smaller parts that could be digested by the market," says John Estrada, head of Credit Suisse's electronic forex trading group. "Customers would say that buying EUR 250 million / USD is all they want to do, but there is no alternative. And so they'd have to buy a machine or spend money on data analysis.
"But there's another option–in a chain trading the entire volume. While it's an out-of-fashion concept, Credit Suisse claims that its approach to digital blocking can often have a lower market effect–and hence better prices–than breaking trades into small parts. The potential for block trading was rolled out in December 2018, and the bank reports that it protects consumers $16 per million by trading with Credit Suisse in full, rather than using a more conventional time-weighted average value algo that would interrupt a deal. Over a year, that's $7.2 million in savings, the bank says. "Customers like the story and then they like the story further when they know they can save or make more money," says Estrada. Customers adopted the new block trading capabilities of the bank: "They are the only bank that prices us up to EUR / USD 400 million in full. Their effect on the economy is very minimal as far as I can tell while dealing with them, "says Tjerk Methorst, PGGM's senior trader. The block trading prowess of Credit Suisse is operated by its pricing tool for artificial intelligence, which has been slowly rolled out since 2017. The kit is intended to estimate how the market will move in the next few minutes and has helped Credit Suisse to tighten spreads in both minor and major sizes, helping it to win more business. "We realized that the AI engine's advantage enabled us to start quoting greater amounts. When we began rolling out bigger sizes, consumers became more involved and transformed into a positive feedback loop, "says Estrada. A further crucial step was the creation in July 2017 of the bank's International Trading Solutions division, which integrates its wealth management with foreign businesses. For forex, this has encouraged higher internalization rates–the method of matching franchise offsetting trades–as the trading desk has access to a huge set of internal flows. Ignoring mid-book channels Credit Suisse internalizes 99 per cent of its forex trades, keeping a low price hedging.
"With wider distribution and a more diverse collection of buyers, we will internalize more of our sales and decrease the amount that we hedge on the market. This, besides, to obstruct trading and using AI, enhances our customer base's trading outcomes, "says Justin Mitrani, Credit Suisse's head of electronic FX and rates of sales for the Americas.
Tags : Credit Suisse, electronic spot, foreign exchange trades, John Estrada, foreign exchange transactions,