OANDA to Exit Malta in March, to Run European Business from Poland

Why FX Algo Execution is The Future

by FM
Disclaimer
  • Trading taken to the next level
algo trading
Join our Telegram channel

Algorithmic trading has evolved in sophistication since its beginning.

For example, order slicing techniques (dividing a large quantity order into multiple orders, known as “child orders”) have evolved from very simplistic approaches (time based or a number of divisions) to more complicated approaches, which dynamically adapt to market conditions.

As BIS (Bank for International Settlements) stated in their “FX execution algorithms and market functioning” report, historically there are three generations of algorithms:

  • First-generation algorithms: The pioneering EAs generally had simple mechanical rules and were modelled after early algorithms in the equity market. The earliest FX EAs sought mainly to automate traders’ practice of splitting parent orders into child orders and followed strictly predetermined execution schedules. Their lack of sophistication generated distinct trading patterns that were easy for other market participants to detect.
  • Second-generation algorithms: In subsequent iterations of FX EAs, providers strove to develop EAs that reduce market impact and avoid leaving distinct trading patterns by introducing some randomization in the size and timing of child orders. Nevertheless, these algorithms remained essentially on statically defined schedules, and continued to be susceptible to detection through the use of more sophisticated forecasting and pattern recognition techniques.
  • Third-generation algorithms: By the mid-2010s, FX EAs started to use complex statistical models to drive algorithmic decisions and react more dynamically to changes in market conditions, with the aim of further reducing market impact and signaling. These EAs leveraged the increasing availability of real-time market data and computing power to assess market conditions.

Event Driving Market Volatility

One of the reasons helping FX Algorithmic trading grow in usage was the MiFID II initiative from 2018.

It has unbundled research from trading commissions.

Together with the growing demand for automation, it has led to a quick increase in the use of execution algorithms.

It is being estimated that the popularity of algo trading should grow more in the nearest years.

Demand for algorithmic trading solutions should grow, with trading volumes and volatility levels remaining high fueled by several problems, such as Russia’s invasion of Ukraine and a shift in the interest rate hikes policy of global central banks.

Interest rates are the single most significant factor influencing the forex market.

They are the source of the biggest long-term changes in trading direction and the rate decisions alone are often the most important macroeconomic events of the week, driving daily market volatility to extreme levels.

In September, central banks overseeing eight of the 10 most heavily traded currencies delivered 550 basis points of rate hikes between them.

This way they brought the total volume of rate hikes in 2022 from the G10 central banks to 1,850 basis points.

fed
Source: Bloomberg, Finance Magnates Intelligence

FED hiked interest rates by 75 basis points for a third straight time. Also, the Bank of England raised the rates.

The European Central Bank and Bank of Canada raised their benchmark rates, and policymakers in Switzerland put an end to a decade of negative interest rates in Europe.

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 large orders.

algorithm
Source: Coalition Greenwich 2021 Market Structure & Trading Technology Study

A Coalition Greenwich 2021 Market Structure & Trading Technology Study revealed that according to 46% of 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% of 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.

These are most often mentioned reasons to use algo trading and most popular approaches, but there are much more, and FX traders are not limited to only these few.

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.

FxSpotStream has kept 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.

Algorithmic trading has evolved in sophistication since its beginning.

For example, order slicing techniques (dividing a large quantity order into multiple orders, known as “child orders”) have evolved from very simplistic approaches (time based or a number of divisions) to more complicated approaches, which dynamically adapt to market conditions.

As BIS (Bank for International Settlements) stated in their “FX execution algorithms and market functioning” report, historically there are three generations of algorithms:

  • First-generation algorithms: The pioneering EAs generally had simple mechanical rules and were modelled after early algorithms in the equity market. The earliest FX EAs sought mainly to automate traders’ practice of splitting parent orders into child orders and followed strictly predetermined execution schedules. Their lack of sophistication generated distinct trading patterns that were easy for other market participants to detect.
  • Second-generation algorithms: In subsequent iterations of FX EAs, providers strove to develop EAs that reduce market impact and avoid leaving distinct trading patterns by introducing some randomization in the size and timing of child orders. Nevertheless, these algorithms remained essentially on statically defined schedules, and continued to be susceptible to detection through the use of more sophisticated forecasting and pattern recognition techniques.
  • Third-generation algorithms: By the mid-2010s, FX EAs started to use complex statistical models to drive algorithmic decisions and react more dynamically to changes in market conditions, with the aim of further reducing market impact and signaling. These EAs leveraged the increasing availability of real-time market data and computing power to assess market conditions.

Event Driving Market Volatility

One of the reasons helping FX Algorithmic trading grow in usage was the MiFID II initiative from 2018.

It has unbundled research from trading commissions.

Together with the growing demand for automation, it has led to a quick increase in the use of execution algorithms.

It is being estimated that the popularity of algo trading should grow more in the nearest years.

Demand for algorithmic trading solutions should grow, with trading volumes and volatility levels remaining high fueled by several problems, such as Russia’s invasion of Ukraine and a shift in the interest rate hikes policy of global central banks.

Interest rates are the single most significant factor influencing the forex market.

They are the source of the biggest long-term changes in trading direction and the rate decisions alone are often the most important macroeconomic events of the week, driving daily market volatility to extreme levels.

In September, central banks overseeing eight of the 10 most heavily traded currencies delivered 550 basis points of rate hikes between them.

This way they brought the total volume of rate hikes in 2022 from the G10 central banks to 1,850 basis points.

fed
Source: Bloomberg, Finance Magnates Intelligence

FED hiked interest rates by 75 basis points for a third straight time. Also, the Bank of England raised the rates.

The European Central Bank and Bank of Canada raised their benchmark rates, and policymakers in Switzerland put an end to a decade of negative interest rates in Europe.

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 large orders.

algorithm
Source: Coalition Greenwich 2021 Market Structure & Trading Technology Study

A Coalition Greenwich 2021 Market Structure & Trading Technology Study revealed that according to 46% of 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% of 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.

These are most often mentioned reasons to use algo trading and most popular approaches, but there are much more, and FX traders are not limited to only these few.

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.

FxSpotStream has kept 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.

FM
Disclaimer
!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|} !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}