SituationOur customer asked for insight into whether their hedging tactics were appropriate for their order sizes, and if anything should change the way they solicit bids from their counterparties, which were exclusively banks. Like many oil producers, this company preferred to hedge when prices rose to a recent high, or at the top end of a previous range of prices. Further, the customer sought to provide a fair opportunity for each bank to bid for the hedging trades. |  |
SolutionAEGIS traders encouraged the customer to continue, but augment, their current practice of trading large, opportunistic hedges. Why continue this practice, in part? Our team held proprietary data showing that the amount of slippage due to liquidity was smaller than the customer expected, when the market was well bid, exactly when the customer sought to transact. Further, AEGIS’s online, live Request-For-Quote system (Marketplace & Trade Launcher) could effectively benchmark banks’ prior performance and select a few high-quality and skilled bankers/ traders for efficient and discreet transactions. Yet, AEGIS did see room for improvement. The customer began offering smaller trades to generate benchmark data and measure counterparty effectiveness. Using AEGIS’s Trade Insights capability, the customer launched its benchmarking system for a round-robin, head-to-head data set. Meanwhile, it began following AEGIS’s recommendations to conduct smaller trades with carefully selected counterparties (via Trade Insights) and conduct time-bound RFQs to encourage competition. |
OutcomeSeveral benefits emerged. First, the customer was able to reduce the risk of bid-ask (or bid-mid) slippage by avoiding large trades on days when the market had lower liquidity. Second, the customer generated data to show banks that were not awarded trades exactly why they were not selected. This data quantified the actual dollar amount of opportunity cost the customer would have incurred had an inferior bid been accepted. Third, the customer was able to refine its original strategy of placing large trades by confidently selecting the best-performing counterparties for each situation. Finally, more counterparties were able to participate: less capable banks could engage in smaller trades (at low cost to the customer), while top-performing banks were far less likely to be excluded from a deal. |
|
|