FX Markets Asia Awards 2020: Best execution algorithm provider – Morgan Stanley

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Facing evolving demands in a world struck by the Covid‑19 pandemic, Morgan Stanley has adapted to trends and readied a new non-deliverable forward product, while its algo product suite has outshone its peers

Melanie Cristi, Morgan Stanley
Melanie Cristi, Morgan Stanley

Investor Warren Buffett is often quoted: “Only when the tide goes out do you discover who’s been swimming naked.” What happened during the volatility spike in March 2020 would be a prime example, as it was a wake-up call to many of how vital a sound execution algorithm strategy is. 

The example was cited by Morgan Stanley, named Best execution algorithm provider in the 2020 FX Markets Asia Awards. When the Covid-19 pandemic struck, the American bank’s algo product suite outshone its peers – robust algo development, augmented liquidity sourcing capabilities and an empathetic mindset on servicing clients were the foundations, making the bank a long-standing leader in the field. 

The prepared mind

“When liquidity squeezes, as it did during the peak of the first wave of the Covid‑19 pandemic in early 2020, our clients expected higher costs stemming from market impact and wider spreads. Thus, many of our clients looked to algo trading as a viable solution to reducing transaction costs and avoiding trading at any extreme highs or lows,” says Matt Thomas, global head of EFX distribution at Morgan Stanley, citing the doubling of the bank’s FX algo volumes in late February through early March 2020, compared with the monthly average prior to the pandemic.  

Matt Thomas, Morgan Stanley
Matt Thomas, Morgan Stanley

According to Thomas, the bank has allotted considerable resources to developing the internal infrastructure and strengthening its liquidity sourcing capabilities over the past year to enhance algo execution. The team focused on using dark liquidity channels to significantly reduce market impact, and the spread paid. 

 “We believe this trend towards executing away from lit electronic communication networks and onto more bespoke liquidity sources is here to stay,” Thomas says. 

In particular, its spot FX client-to-client matching and mid-matching mechanisms, Fusion Edge and Fusion Mid, saw significantly increased utilisation, correlating with performance improvement of the entire Fusion algo suite.  

In addition to its efforts in reducing market impact costs, the tools from Morgan Stanley empower clients’ quantitative analysis of trading costs. Offering transparent data and thorough comparison of algo strategies assists clients in their execution decision-making process, says Thomas, referring to React, a quantitative pre-trade and in-flight transaction cost analysis (TCA) tool developed by Morgan Stanley. 

Kenneth Ho, Morgan Stanley
Kenneth Ho, Morgan Stanley

 With React, real-time estimated execution cost and duration are provided based on historical observations. React allows the bank and clients to collaboratively visualise fills, passive/aggressive ratios, venues utilised and various benchmarks. Clients can evaluate potential strategy changes in performance against those benchmarks, combining traders’ intuition and skills with analytical tools to make a real difference to execution quality.

Holistic approach

Over the past year, Morgan Stanley has found clients increasingly looking into algo policy set-up. Melanie Cristi, the bank’s head of FX market structure and strategic content, says: “We have noticed a strong emphasis on looking at the entire trade lifecycle, where it’s not just about effective execution but having a robust framework around pre- and post-trade analysis and workflow.” This lifecycle goes from understanding how algos work and putting in place guidelines on algo usage to establishing internal best execution policies and incorporation of post-trade TCA. Cristi says the team’s vision is to stay at the forefront of thought leadership with strategic market structure content and quantitative analytics fulfilling client demand.  

The bank is also onboarding clients that are keen to understand the potential benefits of using algo strategies for Asian currencies in the Asian time zone. Offshore renminbi has been one of the top pairs for clients in the region. 

Facing evolving demands, Morgan Stanley’s team has adapted itself to trends and readied a new non-deliverable forward (NDF) product. Kenneth Ho, Asia head of macro e-distribution, says, “We have spent time studying the unique characteristics of NDF liquidity and deployed innovative solutions to ensure clients will have the same positive experience they have with our current algo offering. Given NDFs continue to gain popularity across the region, our team is focused on continuing to address client needs with innovative solutions that draw on our strong experience as both a market-maker and a provider of execution services.” 

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