Algo trading: worth the expense?

The Boston-based consultancy said a client could potentially end up with a fee structure of $15.50 per million. This figure is based on the many different fees associated with FX transactions.

For any given transaction, a client can expect at least a $7 per million transaction fee, representing a prime broker fee of $6 per million and a CLS processing fee of $1 per million. If clients go through an electronic communications network (ECN), they can expect to pay another $6.50 per million, and an additional fee of $2 per million if the client happens to use a vendor front end, such as FlexTrade, that levies a per-transaction fee.

Aite said that, on top of this, in relation to the introduction of execution algorithms in the FX market, banks are looking to charge an additional $2-$3 per million for access to generic algorithms, and as much as $6-$7 per million to use more sophisticated algorithms that can be customised.

It's a costly business but, as alluded to by those interviewed by FX Week (see related article, this issue), the more vendors that enter the market with algorithms for clients, the more commoditised the business becomes, driving down costs. On the bank side, however, it is still only a handful of banks, including Barclays Capital, Bank of America, Credit Suisse and Lehman Brothers, that are offering algorithms for clients.

Indeed, many dealers have been vocal about whether there is even a need to develop algorithms for clients. This view was supported by the Aite Group report, which said most of the buy-side firms interviewed are still a bit sceptical about the use of execution algorithms provided by banks, ECNs and third-party vendors. All the firms have developed their own investment algorithms, which they believe gives them a competitive edge. Most view the FX market as highly liquid and transparent, and do not see much difficulty in moving large block orders.

In fact, Aite said, some stated they would simply go to their foreign exchange bank to receive a fair price for a large-block transaction, thereby managing the cost factor.