LONDON (Reuters) – Vanguard, the $5.6 trillion asset manager, plans to start using computer-run algorithms this year to trade FX directly with other funds, depriving banks of some of the fees they earn as the middlemen in currency deals.
The head of FX trading at U.S.-based Vanguard, which trades about $225 billion in currencies each month, told Reuters the fund giant was in talks with several forex platforms about launching specialist algorithms designed to seek out and trade with other asset managers.
It plans to start trading with such “algos” later in the year, Andy Maack, Vanguard’s FX trading head, said.
Vanguard is also one of three institutional investors that last week executed the first transactions on a new facility, FX HedgePool, that lets managers trade FX swaps directly with each other for their end-of-month currency hedging needs.
“It is going to reduce some dependency on the banks. It’s not going to replace the banks, but give real money managers new sources of liquidity,” Maack said in an interview.
FX HedgePool co-founder Jay Moore said that the new swaps facility went live on Friday – executing several euro/dollar trades – but declined to comment on the names of the first managers to transact.
Banks play a central role in oiling the $6.6 trillion-a-day forex industry by using their balance sheets and technology to link buyers and sellers, earning a “spread” on transactions. The biggest banks, which hold nearly half of worldwide forex trading, earned a combined $16.3 billion in revenue from FX trading in 2018, data from Coalition showed.
But many investors worry that putting all their orders through banks requires them to give out too much information. The fear is that banks can read trading patterns and use that knowledge to trade against them or offer them worse pricing.