The latest in a seemingly never-ending list of algorithmic trading surveys in the global foreign exchange (FX) market has been released – this time from the influential research house Greenwich Associates.
The US research firm reported that, after years of stagnation, the prevalence of algo trading in foreign exchange remains slower to gain traction than in equities and other classes.
More specifically, while nearly one in two stocks market participants is using algo trading, only 37 percent of buy-side FX traders use algorithmic trading. Further, the algo trades accounts for only 22 percent of overall volumes conducted by users of algo strategies.
“Given the potential stakes, it is only a matter of time before issues of data scarcity and other hurdles are addressed and algorithms take on a central role in FX trading,” says Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology.
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In this report, the Connecticut-based firm attributes the relatively low level of uptake in FX to the lack of trade disclosure requirements. As a result, currency traders were unable to access to the universal data on pricing and execution that inform algorithms in equities. It further explains that after years of watching their equity peers shift business to algorithmic trades, many FX market participants’ trades have been actually originating as second-order hedges, as opposed to alpha generators. This has therefore limited many FX traders from ramping up their use of algos, despite the potential for cost savings and risk management.
Looking a bit deeper, the study further reveals that less than half of FX traders use benchmarks to measure trade performance. And despite that, the increase in transaction cost analysis (TCA) tools has been nothing short of remarkable in other asset classes, fewer FX investors who finally took the leap into the TCA pool themselves.
“However, there is every reason to expect that algo trading will evolve into a mainstay in global foreign exchange. One central reason is the size of the potential market. FX traders view algorithms as a perfect fit for the biggest trades—the area of the market that represents the last redoubt of voice execution,” Greenwich said.
Algo trading involves the use of automated programs to follow a set of instructions to perform trades, taking into account factors such as time, price and volume. Such platforms take advantage of artificial intelligence and human intelligence in order to reduce trading costs and help money managers control their business procedures. The main benefit here is not only to maximize the profits but also to control the market risk and the transaction costs.