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Algorithms help FX managers drive efficiency gains

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One of the key roles that technology plays in global FX and OTC markets, which by their nature are highly fragmented, is the price discovery process; something that is set to become even more critical for MiFID entities in Europe when MiFID II regulation comes into effect on 3 January. Part of this complex regulation will be the need for buy-side firms to demonstrate that they are getting best execution on their trades.

“Without the application of technology, you are beholden to one or two providers, which is not efficient in helping to discover the best price in the market,” says Ron Klipstein (pictured), Head of FX e-commerce at Northern Trust.

Technology also assists traders and makes them more efficient.  It allows them more insight into what is happening in the market.

Moreover, aggregation allows the trader to see and act on what is happening from a market micro structure level. “This is a large advantage Northern Trust has, and is something we pass along to our clients,” adds Klipstein.

In many respects, Northern Trust approaches electronic trading from a unique position. When it comes to electronic FX trading, the bank was not as prominent a player prior to a few years ago. Then, over the last few years, Northern Trust built a compelling global offering that allows clients to benefit from highly automated trade execution with enhanced transparency. 

To achieve this, Northern Trust partnered with a technology group, BEx, LLC, a ‘fintech’ company who specialises in electronic execution and offerings in the FX space. This enabled the bank to hit the ground running using the most advanced technology. 

“They are exclusive to us by design and the partnership has worked well for both parties. It allows us to stay ahead of the curve with the latest technology.  We are able to bring innovative products to market very quickly. 

“We did not have to suffer the pain of re-tooling and dealing with legacy code and hardware.  Our goal is to have technology that is the latest and greatest.  At the heart of our code is a complex event processor, which allows us to process feeds from many fragmented touch points in the market very quickly,” confirms Klipstein.

When Klipstein joined Northern Trust in 2014 he had a clear mission: namely, to build out the bank’s algorithm offering from scratch. It was a clean slate, which rarely happens in large financial institutions where existing technology infrastructure is often saddled by legacy issues. This worked to Northern Trust’s advantage as it allowed Klipstein and his team to offer clients up-to-date and technically advanced strategies from day one.

The major focus, says Klipstein, was to ensure that the Northern Trust ethos was transmitted through its FX e-commerce offering. This ethos is that the client always comes first, they are given full transparency and receive the best client service.  

“We are a large global bank, yet offer very personal service and attention.  This is true across the entire bank. 

“We took our time to research the needs of our client base, and tailor algorithms specifically to them.  Since we have a diverse set of clients, our offering covers the spectrum of client types from global investment managers, traditional long-only equity managers, hedge funds that trade FX as an alpha generating asset class, corporations (both in their pension schemes as well as their hedging and overlay programs), and municipal funds.

“Therefore, we have a broad offering which entails both passive and active strategies,” outlines Klipstein.

This menu of different algorithms includes: Twap, to minimise market impact; Twap random (‘Twap-R’), which varies the time delta between order slices and order amounts, and a fun strategy that Klipstein refers to as “coil”.

This particular algorithm, he says, enables Northern Trust’s clients to buy or sell when the market is moving inverse to their direction, and they are seeking to capture an edge and execute larger size orders with minimal market impact.  

“This strategy and ones like it,” says Klipstein, “are very important when trying to minimise market impact or telegraphing one’s intent to the market.  

“We also offer industry standard algorithms such as peg and iceberg, which should be familiar to most players in the equity space. 

“In short, we offer clients a concise, rules-driven approach to executing their orders in the market via one of these algorithms.”

This need for a broad set of algorithms is proving crucial to asset managers, both large and small, as they look to seek out the highest quality liquidity to execute their trades as efficiently as possible, with minimal information leakage to the market. Moreover, buy-side firms are looking to demonstrate competitive executions to their stakeholders, boards and investors. 
Market regulation over the years has, in some ways, proved to be a catalyst for better technology to support managers and provide them the requisite transparency needed for reporting; both to the regulators and their end investors. 

This has led to a proliferation of sophisticated algorithms, because, as Klipstein explains: “Executing a trade via an algorithm offers a clear and concise rules-driven approach, which is easy to repeat and explain.  

“When paired with the correct mix of liquidity, technology and credit, these algorithms become very powerful execution tools for the end user.  We believe that we have the solution, and are quickly deploying it globally across our client base. Our suite of algorithms offers truly competitive execution, leveraging our deep and broad liquidity, which has been carefully curated.”

As well as offering a standard mix of algorithms, Northern Trust is well placed to support managers with customised algorithms when trading global FX. These can include things as simple as integrating with a client’s backend accounting system, or allowing their EMS/OMS  (execution/order management system) to communicate directly to the bank’s suite of algorithms to provide true straight-through-processing functionality.

“Some clients have very specific execution needs, especially those who trade FX as an asset class. These clients are able to leverage our technology, liquidity and credit to quickly and efficiently enter the market with minimal impact, based on their own directional strategy and timings of when to enter and exit the market,” states Klipstein.

One other key factor when considering how technology is helping to make FX trading more efficient is the fact that it helps to drive down trade latency. To address latency concerns, and to be able to obtain the best price available for clients, Northern Trust is co-located in the same data centres in which the larger banks house their trading engines around the globe. This allows Northern Trust to be as close as possible to the liquidity providers and to respond to price updates in the same millisecond they are broadcast.  

“Additionally, since our algorithm strategies and systems are all home grown, we have the flexibility to adapt quickly to any changes from the liquidity providers,” says Klipstein, adding that the core foundation of all Northern Trust’s algorithms is built on three pillars: technology, liquidity, and the bank’s strong credit rating.  

“On the technology front, we are taking advantage of complex event processing.  In simple terms, this translates to having the ability to process quotes from multiple and disparate sources around the globe, using effective computing power,” concludes Klipstein.

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, DC, and 23 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of 30 September, 2017, Northern Trust had assets under custody/administration of USD9.7 trillion, and assets under management of USD1.1 trillion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 USA, incorporated with limited liability in the US. Global legal and regulatory information can be found at


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