Vanguard Plans to Sidestep the Banks with New Algorithms

Vanguard, the U.S.-based head of forex trading, plans to launch a revolutionary project. It trades about $225 billion each month in currencies. The fund giant will start using new, computer-run algorithms this year. With this algos, it can trade FX with other funds directly, without go-betweens. As these mediators are banks, it means that they will lose their fees earned in currency deals. The new project will start this year.

Presently, banks connect buyers and sellers by using their balance sheets and technology. And meanwhile, earn their “spread” on transactions. According to Coalitions data, the major banks who participate in forex trading earned a combined $16.3 billion in revenue from it in 2018.

If the Vanguard’s plan works, the companies will save significant amounts during the trading while bypassing banks. However, there is another reason why traders want to make transactions without mediator banks.

Lots of investors worry that they give banks too much information by putting their orders through them. If the banks manage to read trading patterns, they could use that knowledge to trade against investors or even offer them worse prices.

Which Platforms Will Use Vanguard’s New Algorithms?

Andy Maack, Vanguard’s FX trading head, announced that Vanguard is already using algorithms. But so far, they worked for other buy-side players during the trading on bank-run platforms. From now on, they want to begin using algos on multi-dealer platforms, such as Refinitiv’s FxAll, EBS, and 360T.

The use of algos is going to reduce some dependency on banks. Of course, it won’t replace the banks, because they offer better liquidity. But real money managers will have new sources of it too.

Maack also stated that while the banks will always play a role, Vanguard wants to customize their liquidity sources so that it can go without a mediator between different groups of buyers and sellers.