FX algo execution: three flavours of internalisation

Asif Razaq, Global Head of FX Algo Execution at BNP Paribas, speaks to FX Algo News about the growing trend of internalisation


The idea of internalisation has undergone a major shift in the FX world. Once relatively unknown, it’s now a high value offering for corporate and institutional clients engaged in FX algo trading. But as competition between algo providers intensifies, how can internalisation help them stand out from the crowd?

Internalisation explained

While internalisation is growing in popularity, the absence of an industry standard definition has led to a misunderstanding or lack of clarity around exactly what it is and its benefits. Asif Razaq, Global Head of FX Algo Execution at BNP Paribas, speaks to FX Algo News about the growing trend, the advantages it brings, and the need for a clear definition. Read the full article here.

Put simply, internalisation means all or a part of a client’s order is filled by the bank or liquidity provider (LP) rather than on an external venue. Banks or LPs can match two opposite trades from clients instead of sourcing liquidity from the external markets. Along with many other benefits, internalisation leads to reduced brokerage costs for the bank or LP, which can be passed to the client through more competitive bid offer prices.

Three flavours

With many ways to trade FX and the sophisticated set-ups of bank trading desks, internalisation can come in different forms. From a regulation standpoint, corporate and institutional clients must be able to demonstrate best price execution. As such, there is growing demand from clients to understand how internalisation is achieved and the impact it has on the execution price. While banks may differ slightly in their definitions of internalisation, BNP Paribas offers ‘three flavours’, as Razaq explains to FX Algo News.

  • Block matching: Within its FX algo suite, Cortex iX, BNP Paribas can match two opposite trades, or parts of trades, from different clients. If one client wants to buy USD and another client is selling USD, BNP Paribas can match these trades and internalise the flow. The ability to internalise flows this way relies on the bank having a busy algo desk. The more orders placed through Cortex iX the higher the chance BNP Paribas can match it against an opposite order.
  • Indirect internalisation: BNP Paribas can also match orders made through Cortex iX against liquidity held by BNP Paribas’ market making desk. The market making desk may hold onto liquidity until it’s able to find a client to trade with. BNP Paribas’ algo desk can use this pool of liquidity to offset against algo orders.
  • Market making: Algo orders can be placed directly with orders through the market making desk, effectively becoming BNP Paribas’ price on one side. For example, if a client of the marketing making desk puts in a request to sell USD and a client of the algo desk puts in a request to buy USD, the two requests can be matched directly, with the algo order becoming the bid price.

Award winning algo offering
Cortex iX is BNP Paribas’ award winning FX algo suite, offering three execution algorithms: Chameleon, Viper and Iguana. Cortex iX allows users to define a strategy based on their risk appetite and begin trading. Find out more about Cortex iX and request a demo here.

Here to stay

As the concept of internalisation continues to mature, clients will increasingly look at internalisation rates when they evaluate algo providers. Internalisation is a key value proposition for algo providers, and they must continue look for more ways to increase internalisation, as well as establish an industry standard definition, in order to ensure transparency and stay relevant in an ever-changing world of FX.