TraderTools to roll out algo suite for regional banks

TraderTools is planning to introduce a suite of algorithms later this year, designed to enable regional market-making banks to act like high-frequency traders (HFTs) in their own local currencies.

By incorporating algorithmic logic into its automated pricing engine, TraderTools aims to boost the ability of these banks to make markets in their local currencies naturally and control the amount of liquidity available without having to pay a middleman for access. This, in turn, promises to deliver better execution for bank customers and greater profitability for trading desks.

The foreign exchange technology vendor received an undisclosed amount of fresh capital recently, which it used to acquire intellectual property now being integrated into the business. That intellectual property focuses on rules-based algorithmic market-making technology.

We think we have access to some very sophisticated math, which will make some of our algos operate differently, both on the passive and the aggressive side

Yaacov Heidingsfeld, TraderTools

TraderTools aims to get its first algos to the market by the end of the second quarter, and both passive and aggressive strategies will be included.

“We think we have access to some very sophisticated math, which will make some of our algos operate differently, both on the passive and the aggressive side of the business,” Yaacov Heidingsfeld, co-founder and president of TraderTools, tells FX Week.

“If you abstract the intellectual property that an HFT would use in order to make markets – and they are all algorithm driven – [and] match that to natural inventory, you have a winning solution,” he adds.

Information advantage

Market-makers using TraderTools’ Unique Liquidity Network (ULN) have a strong presence in emerging and local market units, such as the Eastern European currencies, the Russian ruble, the South African rand and the Turkish lira.

The options for banks in these underserviced markets are usually limited because they lack access to credit lines in various places.

Moreover, they do not have the resources to hire and manage a quant team to create and manage their inventory, and so it can be challenging to move large positions without experiencing market impact.

To get a better level of access, regional banks must pay a larger bank to use its algos. Alternatively, they can put their bids and offers on a matching platform in the hope that those with whom they have a credit line will see it.

Through its ULN, TraderTools leverages the credit relationships that intermediary banks have in order to broaden distribution for local regional banks in emerging market countries.

Regional banks retain the information advantage they have on their home turf since TraderTools does not publish the order information – ensuring no one gets a free ride, the company says. Market participants usually subscribe to data feeds, so they can collect and process data as quickly as possible to ascertain market movement.

Heidingsfeld says that if regional banks are in control of their information and not paying a third-party for the access they need, they can protect themselves better against adverse market impact.

“We have identified a niche that really nobody else is focusing on. Over time, we may get some competition. But we also think that as long as our customers are happy, and we are servicing our customers, we will be able to maintain them,” Heidingsfeld says.

Traditional market-makers are averse to making markets in local market currencies, he adds. That is because it’s likely that they will get run over, since they lack local expertise and so rarely have the full picture on liquidity, businesses, the direction of interest rates and similar information.

More than $5 trillion is traded daily on currency markets. Small and regional banks that do not engage in market-making but are clients of the large dealer banks account for approximately 22% of the turnover, according to the 2016 Bank for International Settlements survey.

Earlier this year, TraderTools moved its hosting infrastructure to the Abacus Private Cloud to expand the ULN, with the expectation that it will make costs more scalable and allow it to become more aggressive in its pricing.

The firm is one of a handful of vendors to have received an influx of capital over the past year. In November 2018, Integral received a $15 million investment from Morgan Stanley, which the technology firm said would help it to grow its FX platform across a broader set of clients.