Brazil: Carnivals, Coffee And Now BRL Algos

As the NDF market has become electronically mature in recent years, BRL algos have become the latest innovation on the market.


FX traders are always seeking liquidity, efficiency and speed. Algorithms (algos) deliver all three but have traditionally been the reserve of major currencies only. Now, thanks to powerful new technology, banks are pushing into new territories. BNP Paribas’ non-deliverable forwards (NDF) offering for Brazilian Real (BRL) is the latest example of innovation in the market.

The NDF market has become electronically mature in recent years. As a result, sell-side firms have seized the opportunity to develop NDF algos. This allows clients to automatically trade NDF contracts, to capture spread and reduce operational risk. Demand for these algos continues to grow as clients become increasingly comfortable in using them. As such, banks are now looking to expand their NDF algos into less liquid markets such as the Brazilian Real.
This is a new domain for this kind of trading which has until recently lacked the necessary liquidity for developing effective algo strategies. This represents the latest innovation in a market undergoing constant change.
Powerful new technology is unlocking new markets as banks push the limits of what is possible in eFX.

Asif Razaq

We constantly push the boundaries when it comes to algo execution. This latest innovation highlights our client-focused approach in delivering digital solutions.

Asif Razaq, Global Head of FX Automated Client Execution

“We constantly push the boundaries when it comes to algo execution. We strive to meet clients evolving needs”, commented Asif Razaq, Global Head of FX Automated Client Execution. “The introduction of our new BRL algo is a significant milestone, being one of the first algos to support this market. This latest innovation highlights our client-focused approach in delivering digital solutions.”

What is a Non-Deliverable Forward?

NDF’s have grown in popularity in recent years. They have given firms the ability to hedge foreign exchange risk in currencies that were once unavailable to them. They also allow investors the opportunity to trade these currencies to generate return.

NDF’s are currency derivatives contracts that allow market players to invest in or hedge a currency that has low liquidity, or is not freely exchanged. They are similar to forward contracts where an exchange rate is agreed for a future date. However, instead of delivering the currency at the end of the contract, the difference between the agreed NDF rate and the fixing rate (the current spot market rate) is settled in cash between the two parties, usually in USD. This is useful for companies wanting to deal with non-convertible currencies with low liquidity such as emerging market currencies. The largest NDF markets are Chinese Yuan, Indian Rupee, South Korean Won, New Taiwan Dollar, Brazilian Real and Russian Ruble.

However, as electronic trading in NDF markets grows, they have become increasingly more complex and fragmented. Much like spot FX, trading activity takes place across multiple venues. Banks, however, have overcome this challenge with the deployment of NDF algos helping to automate execution and optimise costs.

Automating with algos

The electronification of the NDF inter-bank market has created an ideal environment to launch NDF algos and improve liquidity. Similar to algos seen in the FX spot market, NDF algos are able to source liquidity across multiple venues and execute trades on behalf of clients, automatically, while securing optimal pricing. Due to NDF being a relatively illiquid market, with greater spreads than the most traded, or ‘G10’, currencies, these algos are well positioned to capture wider spreads providing favourable pricing for clients.

BNP Paribas recently introduced its first NDF algo for Asian currencies, adapting its existing algos to manage the nuances of the NDF market and giving clients the ability to automatically trade large NDF contracts. The bank has seen over $17bn of NDFs executed via algo since launching its NDF suite.

As clients become confident using these algos, demand for BRL contracts has steadily increased. Whilst the journey of NDF algos started in Asia, with BNP Paribas offering IDR, INR, KRW, PHP & TWD, the bank has now expanded its offering to include one of the first BRL algos on the market.

While liquidity has traditionally remained low in this market, BNP Paribas’ local presence in Brazil has allowed the bank to tap into the richest source of on-shore liquidity on the Brazilian Mercantile & Futures Exchange (BM&F). Depth and quality of the liquidity pools is an essential component of execution algorithms. The algo must be able to source good quality liquidity in order to provide optimal execution. BNP Paribas’ NDF algos take advantage of fragmented external liquidity sources, but also tap into the bank’s local market franchise and internalise the flow by utilising pools of internal liquidity sources.

Find out about BNP Paribas’ algo offering here.