Shell Pioneers Corporate Use Of Algo Trading In Forex

DECEMBER 1, 2011

— Royal Dutch Shell has been using algorithmic FX trading for the last six months

— It uses computer model-driven trading to get trades done rather than to speculate

— The oil major uses three types of algorithms to trade in London, Singapore and Rio de Janeiro

By Katie Martin Of DOW JONES NEWSWIRES

LONDON (Dow Jones)–Anglo-Dutch oil company Royal Dutch Shell PLC (RDSA.LN) has been using algorithmic trading in foreign exchange for the past six months, the firm’s head of foreign exchange said Thursday.

This high-tech computer model-driven form of trading is more common among profit-seeking funds and trading firms. But speaking at a conference in London, Paul Downie said he tracks all algo trades against prevailing market rates after execution to ensure he has received the best price–a rare insight into corporate trading methods.

Unlike funds, Downie does it not to speculate on the market, but to get trades done.

He said algorithmic trading offered Shell complete transparency over order execution and enabled it to be more flexible when deciding the size of its orders. He also said it ensured anonymity and more control over the trade, and predicted a bright future for the practice.

“Using algos has made currency dealing very exciting,” Downie said. “For me they are the linchpin for continuous improvement in our dealing.”

Shell–one of the first non-financial firms known to be dabbling with such execution methods–said it was using three types of algorithms to trade in London, Singapore and Rio de Janeiro.

One type is suitable for large trades, when the market impact on price is minimized by the algorithm splitting the trade up into smaller, more easily digested sizes. The second type involves a more sophisticated method where the computer searches for liquidity on separate venues, while the third involves programs that incorporates algorithmic decision-making into the process.

“We have seen a lot of new algos coming out this year from banks,” Downie said. “We are now more focused on pre-trade analysis and there are now algos that monitor other algos.”

But there are disadvantages, Downie added, noting that it means paying brokerage fees to banks, and that the company can be left to market swings during the execution period.

When a company executes its trades algorithmically, the executing bank doesn’t take on the risk involved in the trade, but allows the company to hold on to it and make the execution on the bank’s platform. This means that the company holds the currency risk all the way through, in contrast with traditional methods where the bank takes on the currency risk for a fee that is built into the bid-offer spread.

-By Katie Martin, Dow Jones Newswires; 44 20 7842 9305; ([email protected]) @djfxtrader

(Eva Szalay contributed to this article.)

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