Foreign exchange traders are gaining trust in the market structure and are using increasingly sophisticated execution technology, which will pave the way towards greater adoption of algo execution, according to Bloomberg Tradebook.
“Typically, markets begin to “electronify” when traders transition from the phone to electronic request-for-quote. From there, they start taking greater control of their orders and executions through direct market access (DMA) in a central limit order book market structure. As trust increases, they then cede control over their manual processes to algorithms,” says Gary Stone, chief strategy officer at Bloomberg Tradebook.
Last year was a “watershed year”, Stone adds, as FX trading went through a similar evolution to that which has been seen previously in equities, options and futures markets. While surveys show FX algorithms accounting for only a small proportion of FX trading, Stone believes the headline figures fail to account for the progress that is being made.
Based on analysis of order type activity on its FX ECN, Bloomberg Tradebook found that the percentage of notional executed using its ‘Time-and-Cancel’ DMA algo rose from 16% in 2013 to 39% in 2014. Time-and-Cancel enables aggressive orders to seek enhanced liquidity by spending a longer time working the order in the market.
“Focusing on algorithmic execution looks at the top of the pyramid in terms of sophistication. Algo usage may not yet be as significant in FX as other asset classes, but the market is clearly evolving towards it,” says Stone.