HSBC FX Implementation Shortfall (IS) Algorithm
Innovative Access to HSBC’s Unique Network of FX Liquidity
What the Algorithm aims to achieve
The HSBC FX Implementation Shortfall (IS) Algorithm aims to execute an order minimising slippage from the primary market mid price at order Start Time. To achieve this objective, the
Algorithm manages the trade-off between market volatility risk and market impact, by optimising the number of child orders to place across HSBC’s unique network of FX Liquidity Pools, their
size and the time interval between them. The Algorithm also balances the opportunity cost between placing passive orders or crossing the spread by using proprietary fill probability and
market impact models, and will aim to achieve full completion by the client-specified End Time.
Specify the following parameters to meet your execution requirements
Currency Execution
Trade parameters: Instrument (Spot/Forward) Direction Order Size Value Date
Pair Currency
Market volatility risk
Algorithm parameters:
Start/End Time
By default, the Algorithm starts immediately and expires at date roll time of the selected Pair (typically 5 p.m. EST). Aggressive
The client has the option to specify a later Start Time and/or an earlier End Time. In any case, if the order is not
completed by the End Time, a partial fill is returned.
Limit Price
If specified, the Algorithm will consume liquidity at prices no worse than the Limit Price. This may prevent the IS
Neutral
Cost
Algorithm from achieving full completion.
Liquidity Pool
Choose which FX Liquidity Pools (Market and/or HSBC) to interact with, balancing the trade-off between execution
cost and information leakage. Passive
Execution Style
Choose between Passive, Neutral and Aggressive Styles according to your level of market volatility risk aversion.
Market Impact
Time
Three different Execution Styles for different scenarios
Use this Style when you are comfortable to take on market volatility risk and aiming to minimise execution cost
Passive
The Algorithm will try to execute more by passive orders, resulting in a longer execution time
Use this Style when there is a perceived equilibrium of buying and selling behaviour in the market
Neutral
The Algorithm will be moderately risk-averse with perceived risk aversion being balanced by execution cost savings
Use this Style when you are aiming to execute fast
Aggressive
The Algorithm will be highly risk-averse and will most of the time aggressively consume available liquidity whilst minimising market impact
Amendment: during the execution, you are able to amend the Order Size, End Time, Limit Price, Liquidity Pool or Execution Style should your requirements change.
Execution risk
The execution risk associated with the use of this Algorithm resides with the client, not HSBC. When using an IS Algorithm instead of immediate execution via Risk Transfer, the price of the
transaction is only known after the execution. The market might move considerably during the execution, which may or may not result in a disadvantageous outcome for the client. If a Limit
Price is specified and the market moves considerably, the Algorithm may not achieve full completion. Due to uncertainty of legged executions for illiquid currency pairs, there may be market
conditions in which HSBC is not able to guarantee the Limit Price on child fills. Execution will ultimately always be liquidi ty-dependent, e.g. if the market becomes distressed, the Algorithm
may fail to complete the order before the End Time. HSBC may be active in the market with its own orders at the same time as client orders. Although treated independently, they may interact
in the market and compete for the same liquidity.
Please contact us for further information: fxalgo@hsbc.com
HSBC FX IS Algorithm on Evolve
Disclaimer
This document is issued by HSBC Bank plc and has been produced by a member of the Sales and Trading Department of HSBC Bank Plc
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September 2019
