Algo adoption rates in FX have remained surprisingly flat over the last five years, even as algorithmic trades proliferated in other markets that have become largely electronic in nature. However, after last year’s spike in usage, about one in five FX market participants are now trading via algorithm—a share that is consistent across the major markets of North America and Europe, and on the rise in Asia.
Satnam Sohal, Principal at Greenwich Associates and co-author of: FX Execution: Competing in a World of Algos explains, “As FX market participants adopt sophisticated pre- and post-trade analytics enhanced by artificial intelligence and machine learning, the potential benefits of algo trading are becoming clear, and hedge funds and real money accounts are leading the charge.”
“Technology and regulation are transforming FX trading,” says Frank Feenstra, Managing Director at Greenwich Associates and co-author of the report. “In the new world of best execution, algos offer clients an important tool to source liquidity and minimize costs.”
Impact of investments
Interestingly , Greenwich Associates believes that the investments that FX dealers are making in their algo offerings are likely to fuel further growth in the use of algo tools by FX clients. Leading dealers are moving past VWAP and TWAP algos and are starting to offer the buy side access to third-generation tools that, among other things, allow for “in-flight” adjustments, where algos self-adapt during the execution cycle. The range of FX products for which algos are being developed is also expanding to include non-deliverable forwards (NDFs) and baskets of trades, rather than only individual transactions. These developments—i.e., improved algo tools that enhance execution performance and algos that can be used for FX products beyond vanilla spot trades—are likely to support further growth in client adoption and the types of trades being executed via algos.