Crypto currency

FX Algo Trading is On the Rise

Foreign Exchange market underwent a long way since its beginning. Initially, from a technology point of view, it was all about voice/telephone trading. Up to the late 1980s, the FX market was a typical a broker-dealer market. Most transactions took place in the inter-dealer core of the market.

In the second or outer tier of this market was activity between dealers and their customers, where bid-offer spreads were wider than those in the inter-dealer market. Calls for price and transactions were done over the telephone, hence “voice trading” is the label of this era and this form of interaction with dealer.

In early 1990s, we saw the proliferation in the usage of electronic trading, with the later emergence of dedicated platforms and ECN (electronic communication network). The idea of ECN was nothing new for financial markets. It was already used on stock exchanges in the ‘1970s’. But in FX industry it emerged later. As we will later discover, the FX industry is often few years behind equities in adoption of some technologies.

Today, in an electronic trading dominated FX environment, we are observing the next shift in technology – the growth in algo trading. While this is nothing new, it did however recently become more and more engrained as a concept for participants of the FX industry.

COVID Era Helped the Algos

In the environment of a growing pandemic, more and more sectors of the economy began moving more into a “home office” style of doing business, with a larger emphasis on “remote working”. This was also the trajectory for the financial industry. The growing number of people working remotely, has also fostered a growing need for automation in trading. This also necessitated companies to meet a new market demand. FxSpotStream is a great example of this, having launched its FX Algos and Allocations service back in 2021.

“As the pandemic unfolded, clients seemed to quickly appreciate the fact that algos can be used for smaller sized orders, that they actually are robust, and in times of volatility they are able to give the outcomes that people say they will give,” said a senior bank trading executive, speaking on the algo “FX Market Structure 2022 “panel, hosted by The Full FX.

Why Using Algo Trading in FX?

Basically, clients have one of the following objectives when selecting an algo strategy:

– to reduce market impact and save trading costs

– to minimize market risk

– to maximize execution certainty

Traditionally, clients have been using algo strategies mostly in the case of the large orders. A Coalition Greenwich 2021 Market Structure & Trading Technology Study revealed that according to 46% responders, algo trading is a “must do” in case large orders worked overtime. According to another 31%, it is very probable thing to do. Also, the large orders that need to be executed quickly are the situations to consider algos.

According to 46% responders, it makes a lot of sense to use algos in such situation and 15% of responders are certain than algos should be used here. In case of small orders, a staggering 75% answered, that usage of algos would be not likely at all.

What type of algos are being used in FX trading? The same survey from Coalition Greenwich reveals that liquidity-seeking algorithms are the most popular, used by 69% of respondents. Time-weighted average price and volume-weighted average price are the next most popular algos.

These types are most popular but there are much more, and FX traders are not limited to these few only. FXSpotStream offers its clients 70 different algos and more than 200 parameters within those strategies.

Just recently, FXSpotStream extended its LPs’ algo offering from its original API channel to its GUI. Since launching algos in July 2021, it has supported over $19 billion in algo volumes across 46 currency pairs in spot and NDFs, from eight clients accessing 26 different strategies from 10 LPs.

Where is FX Algo Trading Today and What Is Its Future?

According to the survey from Coalition Greenwich, only 17% of FX traders surveyed utilized algorithms to execute trades. We know from other sources that during the pandemic these numbers were often higher. We also know that in case of equity trading, algo trading is responsible for approximately half of the institutional volume. So, there is still a room for further growth of algo trading in FX institutional environment.

The FX Global Code to Drive Algo Adoption by Coalition Greenwich shows that 69% of responders believe that algo use in FX will increase. None of the responders thinks it can decrease. The use of FX Algos has been a growing segment of the FX Market as clients target the best way to execute their trades, while limiting their risk. This process will most likely only speed up.

FxSpotStream keeps expanding its algo offer since early 2021. The recent extension of it to GUI aims to make the usage of algos even easier. The GUI is based upon HTML5 technology, which allows it to be launched directly from a browser without any need to download software onto a local PC/network.

The combination of the algo functionality with the support for allocations means FxSpotStream will be able to support a growing number of hedge funds, asset managers, multinational corporations, and regional banks.

Foreign Exchange market underwent a long way since its beginning. Initially, from a technology point of view, it was all about voice/telephone trading. Up to the late 1980s, the FX market was a typical a broker-dealer market. Most transactions took place in the inter-dealer core of the market.

In the second or outer tier of this market was activity between dealers and their customers, where bid-offer spreads were wider than those in the inter-dealer market. Calls for price and transactions were done over the telephone, hence “voice trading” is the label of this era and this form of interaction with dealer.

In early 1990s, we saw the proliferation in the usage of electronic trading, with the later emergence of dedicated platforms and ECN (electronic communication network). The idea of ECN was nothing new for financial markets. It was already used on stock exchanges in the ‘1970s’. But in FX industry it emerged later. As we will later discover, the FX industry is often few years behind equities in adoption of some technologies.

Today, in an electronic trading dominated FX environment, we are observing the next shift in technology – the growth in algo trading. While this is nothing new, it did however recently become more and more engrained as a concept for participants of the FX industry.

COVID Era Helped the Algos

In the environment of a growing pandemic, more and more sectors of the economy began moving more into a “home office” style of doing business, with a larger emphasis on “remote working”. This was also the trajectory for the financial industry. The growing number of people working remotely, has also fostered a growing need for automation in trading. This also necessitated companies to meet a new market demand. FxSpotStream is a great example of this, having launched its FX Algos and Allocations service back in 2021.

“As the pandemic unfolded, clients seemed to quickly appreciate the fact that algos can be used for smaller sized orders, that they actually are robust, and in times of volatility they are able to give the outcomes that people say they will give,” said a senior bank trading executive, speaking on the algo “FX Market Structure 2022 “panel, hosted by The Full FX.

Why Using Algo Trading in FX?

Basically, clients have one of the following objectives when selecting an algo strategy:

– to reduce market impact and save trading costs

– to minimize market risk

– to maximize execution certainty

Traditionally, clients have been using algo strategies mostly in the case of the large orders. A Coalition Greenwich 2021 Market Structure & Trading Technology Study revealed that according to 46% responders, algo trading is a “must do” in case large orders worked overtime. According to another 31%, it is very probable thing to do. Also, the large orders that need to be executed quickly are the situations to consider algos.

According to 46% responders, it makes a lot of sense to use algos in such situation and 15% of responders are certain than algos should be used here. In case of small orders, a staggering 75% answered, that usage of algos would be not likely at all.

What type of algos are being used in FX trading? The same survey from Coalition Greenwich reveals that liquidity-seeking algorithms are the most popular, used by 69% of respondents. Time-weighted average price and volume-weighted average price are the next most popular algos.

These types are most popular but there are much more, and FX traders are not limited to these few only. FXSpotStream offers its clients 70 different algos and more than 200 parameters within those strategies.

Just recently, FXSpotStream extended its LPs’ algo offering from its original API channel to its GUI. Since launching algos in July 2021, it has supported over $19 billion in algo volumes across 46 currency pairs in spot and NDFs, from eight clients accessing 26 different strategies from 10 LPs.

Where is FX Algo Trading Today and What Is Its Future?

According to the survey from Coalition Greenwich, only 17% of FX traders surveyed utilized algorithms to execute trades. We know from other sources that during the pandemic these numbers were often higher. We also know that in case of equity trading, algo trading is responsible for approximately half of the institutional volume. So, there is still a room for further growth of algo trading in FX institutional environment.

The FX Global Code to Drive Algo Adoption by Coalition Greenwich shows that 69% of responders believe that algo use in FX will increase. None of the responders thinks it can decrease. The use of FX Algos has been a growing segment of the FX Market as clients target the best way to execute their trades, while limiting their risk. This process will most likely only speed up.

FxSpotStream keeps expanding its algo offer since early 2021. The recent extension of it to GUI aims to make the usage of algos even easier. The GUI is based upon HTML5 technology, which allows it to be launched directly from a browser without any need to download software onto a local PC/network.

The combination of the algo functionality with the support for allocations means FxSpotStream will be able to support a growing number of hedge funds, asset managers, multinational corporations, and regional banks.

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