When we talk to FX market participants in the Americas algo trading is a topic that frequently comes up, even though — relatively speaking —the adoption of these tools is not that widespread.
Estimates of how much FX trading globally occurs via algos vary widely, but perhaps the last authoritative one came from the Bank of International Settlements (BIS) back in 2020 in a report which estimated that between 10- 20% of the Spot market (or $197bn-$396bn in daily notional volume) is executed via algos.
I am confident that this figure has risen in the subsequent years, an assertion which is backed up by multiple industry reports and, of course, the increase in algo trading that we’ve observed across 360T over this period. We also have access to more recent data on this topic. In our annual global client survey last year, 24% of corporate treasurers, 41% of banks and 37% of institutional clients that responded indicated that they currently use FX algos. Interestingly, these numbers jump up significantly when you segment just the Americas survey respondents, with 31% of treasurers, 62% of banks and 50% of institutional clients indicating that they use FX algos.
Charting algo growth
There are many reasons why FX market participants are increasingly turning to algos to execute their transactions. These include:
- Minimising market impact when trading
- Reducing execution costs by not paying a risk transfer fee
- A desire to increase trader productivity by automating flows
- Reducing operational risks by eliminating manual processes
- Liquidity optimisation in a fragmented marketplace
As the benefits of algo usage become more widely understood, and as a broader swathe of FX market participants become comfortable using these tools, we expect their adoption to expand across all client segments.
This expectation is supported by the results of our client survey, where in the Americas 45% of respondents said that they expect their algo usage to increase over the next three years, 52% expect it to remain the same, and just 3% said that they expect it to decrease.
A more granular breakdown of the data across different client types is revealing, and generally aligns with existing algo usage. Banks overwhelmingly expect to use more algos in the coming years, while institutional firms and corporate treasurers, though slightly more cautious, are still clearly moving toward greater adoption of these tools.
Independent thinking
If algos are likely to become even more prominent in the FX market, as we expect, it is worth considering what innovations or trends are likely to emerge in this space over the coming years.
One area where we think there is potential for growth is in the provision of algos by independent technology experts, something that is already widespread in other asset classes, such as Equities and Futures. Independent algo providers have flourished in other asset classes, in part, because they do
not have a principal trading or market making business and therefore there can be no perceived conflicts of interest about how or where their algos are deployed.
Another reason for their success is that building and maintaining a suite of market- leading algos requires significant investment and expertise, and as specialists these providers can dedicate all of their resources, focus and domain-knowledge into doing exactly this.
Of course, there are challenges for such specialist algo providers too. Independent fintech firms always face questions about their longevity, funding and ability to scale — especially from larger organisations who tend to take a longer-term view on technology partnerships and implementations.
Questions may also naturally arise about these providers’ ability to access high-quality FX market data at scale, and there may be potential concerns about their proven track record.
Buyside interest
However, we do not believe that these challenges are insurmountable, and it seems that the broader FX industry does not either.
At the TradeTech FX USA conference in 2024, of which 360T was a sponsor, polling conducted on the buy-side focused “Innovation Day” revealed that most attendees — 78% in total — would consider using independent FX algos.
We acted on this client demand, announcing at the same conference earlier this year a partnership with Quantitative Brokers (QB), a specialist independent provider of algos and analytics, that will make its newly launched suite of FX-optimised algos available via 360T.
We believe that QB is an excellent partner to address this gap in the market precisely because it addresses the previously mentioned challenges. As a sister company within Deutsche Börse Group , a large, publicly traded company, QB has a long-term sustainable business model in place and the means to scale globally.
In addition, it has a proven track record as a best-in-class algo provider across the other asset classes that it operates in, and established relationships with many market participants who also already trade FX.
Part of a growing pie
It is worth emphasising that we see the potential for the emergence of independent FX algos as being clearly complimentary to existing bank offerings.
Some banks have invested significantly in developing their FX algos, many of which are available today via 360T where they can be deployed against carefully curated pools of liquidity from many different providers, and we think that the adoption of these will continue to grow.
But there is also the potential for the usage of independent algos to also grow alongside them as an additional tool available to market participants. A useful analogy here might be 3rd party transaction cost analysis (TCA), which has not reduced the value of, or need for, bank- provided analytics, but has become important for buy-side firms looking to demonstrate best execution.
On the flipside, there are some banks who perhaps do not have access to the resources and expertise necessary to build and maintain a market-leading FX algo offering, but still recognise the need to offer one in order to continue growing their franchise.
Where white labelling a suite of algo products from a competitor in the marketplace could prove challenging, leveraging tools that are developed by an independent specialist provider could be a highly beneficial solution.
Supporting innovation
From 360T’s perspective, we are excited to see what the next stage in the evolution of algo trading will look like, and will always strive to offer market participants access to the broadest set of high-quality FX algos available. Doing this involves partnering closely with firms across the FX industry to understand their objectives and desired outcomes when using these tools so that we can both react to, and anticipate, their changing demands.
Innovation has always been central to 360T’s DNA, so it is only natural that we will look to support new and exciting developments in algo trading as it continues to occupy an ever- larger part of the overall marketplace.
