Focus on Algos Rises as IA Publishes Questionnaire

It is perhaps, a sign that use of algos is increasing amongst investment managers, that the Investment Association (IA) has published an FX algo due diligence questionnaire for its members’ use. The recently published JP Morgan Annual e-FICC Trading Survey found that users of algos were intending to increase their volumes by 15% and the IA joins the Global Foreign Exchange Committee in looking at best practices around algos.

The IA suggests that between 10 and 20% of all FX trades are conducted using algos, and while this seems a little high, in spot terms alone it could be nearer the mark. Certainly algo performance during the initial market upheaval in February/March 2020 would appear to have boosted the strategy’s profile and led to a sustained uptick in volumes executed via the strategy at some houses.

In a blog on its website launching the questionnaire, the IA observes that investment managers are among the increasingly common users of FX algos to conduct their trades, as they seek to provide best execution for their clients. It adds, however, that in seeking to protect the interests of their clients and to meet their regulatory obligations, it is vital that investment managers conduct proper due diligence on the FX algos they receive from their providers to fully understand the features offered and the risk controls in place.

The resulting questionnaire has been created by IA members to establish a common framework for the request of information from clients to their FX algo providers. It is intended to help guide managers – and indeed other market participants – as to the kind of questions they should consider when conducting their FX algo due diligence. Topics covered include venue selection, algorithm features and strategies, analysis, risk controls, and confidentiality.

“The IA’s members continue to fully support the push for best execution, with this questionnaire forming part of the wider conversation being had around transparency in FX markets, including as part of the ongoing three-year review of the FX Global Code,” the association states.

Generally speaking the questions raised in the document are standard around how information and orders are handled, however there is a definite focus upon ownership of various parts of the process and the involvement of third parties.

The increased focus on algos doesn’t come without potential issues, however, some algo providers are concerned about exactly how deep into processes the questionnaires go. The GFXC is preparing its own questionnaire for market participants and market sources have told The Full FX the discussion has not been without occasionally heated moments. Algo providers are concerned that some proposed questions risk revealing the IP behind the strategies.