Francesco, you are a highly experienced FX and Money Market professional with a degree in economics, a lecturing accreditation from the ACI and wide knowledge of specialist investment products and services. What attracted you to the currency market and what do you consider to be your particular specialities in FX?
FS: The currency market offers great benefits. It is by far the most liquid, transparent and accessible market in the world. Over the years, it has become a proper asset class with technology having tremendously changed the landscape over the last decade. I am proud to work for RTFX, which has significantly contributed to the technological expansion within this sector. I would not say that I have a specific specialisation. However, I consider myself to be a very well rounded FX professional.
In 2009, when Realtime Forex SA was divided, RTFX became one of the first licensed FX brokers to launch an asset management service. What prompted the restructuring and what is the aim of RTFX in establishing a fund management arm?
FS: RTFX has always been ahead of the curve in terms of technology and service innovation. Back in 2000, its predecessor, Realtime Forex SA, was one of the first entities to develop an online FX trading platform and was the first online FX broker in Switzerland.
The division was prompted by a sweeping change in Swiss regulation resulting in the original founders deciding to forfeit their brokerage activity to RTFX Ltd, a European regulated investment services entity, and thereafter focus their attention on the development of FX trading technology. The R&D on the asset management algorithms had already began in 2006 under the initiative of M. Gay and Glauser and was originally based on crowd intelligence. RTFX Ltd launched its first asset management service tailored to the retail market in October 2009 and we will therefore celebrate our fifth service anniversary later this year.
The goal was to develop a model that would instil systematic trading rules to mitigate the shortfall inherent in traditional trading. The objective therefore was to offer an alternative investment methodology to the vast majority of FX investors who consistently lose money when trading in the currency market.
In addition to RTFX Ltd’s retail service, a second European regulated entity was established in August 2013 with the objective of tailoring the asset management services to collective investment schemes and sophisticated professional investors. Today, RTFX Fund Management Ltd is the Investment Manager to the Algo K Currency Fund SPC (Algo K).
What range of investment and trading activities does RTFX undertake and what type of clients utilise your services?
FS: Through our two different arms (RTFX Ltd and RTFX Fund Management Ltd), the RTFX Group offers a tailored service to retail, professional and institutional clients, an FX trading service, through its online trading platforms, as well as an asset management service. Although we provide a complete and competitive trading service in the foreign exchange market, our efforts are mainly concentrated on our asset management activity, since we believe it will drive our future growth.
Applying the technology developed by RTFT SA, the underlying investment positions in our asset management service are limited to spot transactions in the most liquid currency pairs without overnight positions or dealings in derivative contracts.
Who are the key people involved in your fund management team and what are their main day to day responsibilities?
FS: The Board of Directors of RTFX Fund Management Ltd has established an Investment Committee responsible for the provision of investment management services to the Algo K. This Investment Committee is composed of highly professional and experienced individuals. The Chairman of the Committee, Samuel Perruchoud, has an impressive background gained within the largest global investment banks. Before joining RTFX, Samuel was CIO to the Funds of Hedge Funds division of American Express with responsibilities for the U.S. domestic and international Fund of Hedge Funds activities. Emman Xuereb is one of the portfolio managers and together we are responsible for controlling and monitoring the daily trading activity, including risk management and reporting. Andrew Zarb Mizzi, also General Manager of RTFX Ltd, is the Executive Director, MLRO & Corporate Risk Manager of RTFX Fund Management Ltd and is also a member of the Investment Committee.
Can you tell us a little more about the nature of the funds RTFX is managing, what their strategies are seeking to exploit and what sort of investment objectives you are looking to achieve with them?
FS: Our investment objective is to achieve a positive absolute return over the medium term regardless of market directions, while following carefully defined risk management procedures to limit substantial investment draw-downs. RTFX Fund Management Ltd employs automated trading algorithms specifically designed by RTFT SA for the foreign exchange market, which seek to deliver returns by investing in a strategy that expresses an intra-day directional view and attempts to benefit from price extensions away from daily range trading. The algorithms embed built-in stop-loss and take profits, which ensure that capital is protected by cutting losses early whilst allowing intra-day profitable positions to run.
We seek to achieve this objective through investing predominantly in G10 currencies. Depending on the strategy, the assets under management (AUM) are subject to an average leverage ranging between 2 to 5 times. No options or futures are entered into. A rigorous and systematic approach to trading is applied to quickly track market movements and identify trend formation. The automated trading system and trading limits, in particular, are monitored by system alerts and controlled by the portfolio managers.
How would you describe your approach to managing risk and what techniques are you employing to mitigate it?
FS: The RTFT SA trading algorithms embed investment risk management at the root of the investment process. Position sizing and stop losses are the key elements of the system risk control mechanism. Throughout the trading day, positions sizes increase and decrease in function of the strength of short-term currency pair trends. Similarly, stop losses associated with individual positions get activated as needed. Longer-term risk management procedures, such as overall portfolio protection tools, are not used given the nature of the investment strategy and particularly since all positions are held in cash at each business day close.
The risk management process applied to the first segregated portfolio of the Algo K, Algo Conservative Strategy, seeks to limit maximum daily losses to approximately 1% of the NAV, whilst in respect of the second segregated portfolio, Algo Standard Strategy, it seeks to limit maximum daily losses to approximately 3% of the NAV. The average win/loss ratio varies from 1.50 to 1.70.
What attributes do you believe RTFX possesses that gives it an edge whilst differentiating itself from competitors?
FS: Our best attribute is certainly the technology applied to our investment technique; the investment process is fully automated. Through this technology we have eliminated all subjectivity within our trading decision and applied hard coded trading rules which present a very effective risk management process.
Given the thousands of strategies available from within a selection pool, the RTFT SA R&D Team has developed a recent system enhancement allowing a proactive automated strategy selection process, which selects the strategy that best adapts the investment process to the current market environment.
We pride ourselves for being one of the very few EU regulated specialist FX asset managers to offer a complete service from signal initiation through to transaction execution in a completely automated and entirely transparent manner.
Many currency fund and alternative investment managers have experienced difficulties over the past few years. In what ways do you think this has narrowed the field and presented opportunities for RTFX?
FS: I believe that professional currency managers are already a rare breed within the alternative investment market. This may change since a growing number of FX brokers are turning to this alternative activity. However, I find that one needs to be specialised in this field to sustain the ever changing market conditions. Our track record, together with RTFT SA’s strong R&D experience, will certainly play a major role in our ability to attract more capital flows moving forward.
Thierry, what products and services does RTFT SA provide to RTFX and how does the relationship work between the companies?
TG: RTFT SA offers two different white label solutions to RTFX. The first is the online FX trading platform applied by RTFX to its brokerage service. The second is the asset management algorithm that was originally developed in 2006 and regularly enhanced since then. RTFT SA is an IT Consultant to RTFX and our shareholder structure and corporate governance are completely segregated and independent.
In what ways were you able to assist and advise RTFX about the way they should go about building their IT and trading infrastructure based upon the type of trading they would be carrying out?
TG: Prior to 2009, RTFT SA had offered the service from Geneva since 2000. We therefore hold a very clear understanding of the requirements for trading platform functionalities, hardware infrastructure and security matters. Our expertise and consulting activities include IT Strategy, IT Risk Assessment and IT Security Policies, amongst others. We have also provided support to RTFX during IT audits, together with compliance with the Maltese financial services regulatory authority (MFSA).
How do you go about sourcing liquidity and what factors tend to influence the trading venues you use?
FS: RTFX employs the RTFT SA proprietary hedging algorithm. We source our liquidity from the largest price providers, aggregate bids and offers while taking into accounts possible Prime Brokerage fees. The spread, latency, rejection rates, and PB fees are the main factors that drive our choice of trading venue selection. We tend to avoid price aggregators since the fees are often hidden. We keep a very close relationship with our liquidity providers to ensure a mutually beneficial long-term relationship.
Have you taken any steps to improve your trade connectivity pathways to reduce latency or is that requirement not so important for the type of trading you are undertaking?
FS: As I mentioned previously, latency is a concern. However, although our asset management activity is based on a systematic approach, we are not High Frequency Traders, were latency is probably a major theme. We currently manage 3 strategies and execute transactions during 6 trading time slots every 10 minutes. Our objective is to keep our average ticket size under a certain level, which we have identified as our best price execution. We are currently evaluating and considering an LD4 set-up although we are quite happy with our connectivity thus far.
In what ways does your research framework help you to assess the potential usefulness of a new algorithm and how would you then go about developing and testing it?
FG: Our R&D framework has been built and geared towards the development of asset management algorithms since 2006. We are currently monitoring and testing thousands of different strategies.
Here is the typical flow of an investment idea from inception to a trading position:
1. A High Level Estimation of the concepts potential is performed using statistical data. If this estimation displays insufficient potential, the idea is further refined.
2. If the High Level Estimation exhibits an interesting potential, back testing is performed using tick-by-tick data over the longest period available, usually three to five years. Insufficient potential following back testing may require a refinement to the initial concept.
3. Should the Back-Testing confirm the idea’s potential, a version of the idea is developed and deployed in a staging environment that replicates the production environment.
4. Following successful testing in the staging environment, the developed idea is deployed on the real demonstration environment for several weeks.
5. Once in the demonstration environment, the newly deployed idea is carefully monitored and undergoes multiple rounds of debugging and optimization.
6. Following validation, the new idea is placed on the production system in a dedicated RTFT SA proprietary account. For, at least, a further two weeks, the new idea’s performance is closely monitored and compared to the back-testing data for verification and optimization purposes prior to being submitted to RTFXFM Investment Committee for consideration and approval.
7. Once implemented, RTFT SA performs regular analysis between simulated and real performance to track and monitor any possible divergence.
Can you describe the trade execution process made available to RTFX and the key people involved in the process?
FG: The RTFXFM trade process is fully automated using a trade execution platform developed by RTFT SA. This platform is composed of different systems/modules:
• Asset Management module: Where all trading parameters/algorithms are set (i.e. the strategies as approved by the RTFXFM Investment Committee, including the leverage as well as the stop losses and take profits).
• The Trading System: This includes a front office module and price aggregation module as well as a storage database enabling second level monitoring without human intervention.
1. The Asset Management Module implements the trading algorithms. Taking the prices as input, it takes trading decisions without human intervention, yet provides an interface for monitoring its behavior and possibly intervening in the event of an emergency.
2. RTFXFM Trading System receives a signal from the Asset Management module, which signal is then handled by the price aggregation module. Market prices are electronically sourced through multiple Bank APIs and aggregated accordingly.
3. Trades generated by the Asset Management module signal are thereafter executed on the very same Bank APIs.
4. Human monitoring is performed by the two Portfolio Managers, Emman Xuereb and Francesco Scotto. Four RTFT SA IT Engineers are concurrently also responsible for monitoring the proper trade executions by the system.
5. All items report their status (usually on a 5-minute basis) to a global monitoring system, which constantly monitors and reports any alerts to the Portfolio Managers and IT Engineers.
How often do you adapt existing algorithms to ensure they continue to meet the performance criteria they were designed for?
FG: Over the past 12 months, we have endeavoured to identify ways of updating our algorithms in a more pragmatic and proactive manner. The FX market has become very dormant over the past months. Big trends, such as last years slide in the yen, have vanished and the euro has never been so steady against other major currencies. The absence of volatility has made things far more challenging for us. With the changing environment RTFT SA has gone from a quarterly to a weekly strategy review and evaluation.
In what ways have you been able to provide RTFX with algorithms that are specifically tailored to the firms’ investment strategies and trading styles?
FG: Owing to our long-standing R&D activities and the many different strategies we continuously monitor, we have been able to successfully provide tailored algorithms to both RTFX Ltd for application in their retail offering, as well as RTFX Fund Management in the services it provides to Institutional clients.
Are you able to offer the same or similar services to other FX brokers?
TG: We provide our services to RTFX on an arm’s length basis and we are structured to deliver tailored solutions to any participant in the forex market. Our IT Engineers are experienced in integrating our signal algorithm within various market platforms, such as MT4. We are particularly aware of the footprint that our services may have on the market and will provide our experience and guidance to our partners to mitigate such potentially negative aspect on price execution and underlying performance. Identifying a new partner targeting a different market segment or active in different regions of the world than RTFX would certainly be a progressive step forward. It is our opinion that a well-designed asset management offering will outplay the social trading activity that many brokers venture into.
In what ways do you think new regulatory and clearing requirements that are being applied across the capital markets may impact on your own trading and investment activities and do you see increased regulation as a threat or opportunity?
FS: The fall-out from the 2008 and more recent financial scandals has hurt investors and consequently led to the implementation of the new regulatory environment which is certainly a major concern across the entire market, since it imposes requirements for additional resources, both capital and human, apart from impacting the operating cost base.
RTFX provides its services under two regulatory licences. RTFX Ltd is the holder of a European Category 3 investment services license issued by the MFSA under MiFID to provide discretionary asset management services, whilst RTFX Fund Management Ltd holds a European Category 2 license issued by the MFSA under the AIFMD to provide investment management services to Funds as well as qualified investors.
Given that RTFX operates two independent licences, winning new investment capital represents a key milestone. Notwithstanding its strong capital ratios, RTFX may need to consider additional share capital to remain competitive as a result of the ever-changing operating landscape. We are however very confidant that our long track record and experience will enable us to remain a key market participant in the niche FX wealth management segment in the coming years.
Over the past few years FX has been characterised by reduced volatility and very narrow interest rate differentials between developed currencies. Is this a potential barrier for some of your alpha generating strategies or have you found ways to overcome what can be a handicap for many FX investment managers?
FS: The lack of volatility in the currency market has certainly been an issue over the past 18 months. The major Central Banks have had the same monetary policy and we do not expect major changes before early 2015. Generating Alpha in such an environment is certainly a very difficult task for any asset manager. We believe that the new automated selection process we have implemented with the help of our technology provider will set us apart and enable us to show positive returns despite these adverse market conditions. Volatility will however inevitably return. As a result, those who currently build low volatility strategies will inevitably suffer sooner or later. Only those, like RTFX, able to adapt to the market environment will be successful in the long run.
Looking ahead, where do you see the main challenges facing RTFX as you seek to exploit the risk and reward opportunities presented by the currency markets around the world?
FS: Many challenges lie ahead of us, and perhaps a major hurdle is the negative perception many investors have towards the currency market. Our industry needs to regain the lost credibility following the unethical behaviours of some banks and retail aggregators that have dampened investor confidence to the detriment of genuine market operators. The currency fixing scandal has hurt a market that was considered too large to manipulate.
Another major challenge will certainly be the impact that new regulation will have on current industry business models, increasing the cost for both market makers and market users. On the other hand, opportunities remain enormous in the FX market.
With a well-diversified service offering meeting the expectations of institutional as well as retail investors, together with the strong partnership forged with its technology provider, RTFT SA, and its banking partners, RTFX is well positioned to address future challenges and capitalise on growth opportunities.