Exploring the present use and expected future uptake of FX execution algorithms

June 2023 in Industry Reports

According to the findings of a recent report published by Coalition Greenwich, after years of mediocre growth, FX execution algorithm adoption is looking up.

The report was based on the responses of corporates, banks, fund managers and hedge funds and compared their reported use of FX execution algos each from 2019 to According to the findings, most buyside segments have witnessed a healthy rise in the use of algos since 2020, especially on the real money side. Both fund managers and hedge funds have seen an uptick of algo use, with adoption now at 35% and 46%, respectively. Growth among corporates and banks has been slower, however, only rising slightly over the four years to 13% and 20%.

Report co-author Stephen Bruel, Head of Derivatives and FX, Market Structure and Technology at Coalition Greenwich, says that the trend is a general broader adoption of FX algos, particularly for FX spot. “There are a lot of reasons for this, including improved algo quality and better technology behind the algos,” he adds. “We are also seeing more investment in workflow management and firm being able to now integrate post-trade settlement data into their algo execution strategies. This all helps firms to feel more comfortable about using algos.”

The increased use of TCA has also contributed to the uptake of FX algos, Bruel explains. Firms are now able to get a better sense of the quality of the algo under specific circumstances, whether that is by size, time of day, he adds. “Improvements in analytics reporting will also drive further algo use,” says Bruel. “That might be particularly specific to spot now, but these lessons will certainly be applied to some of the less automated asset instrument types going forward. Once FX spot algos are established even further, it makes sense that it will just cascade into some of the other instrument types.”


According to the report, growth in algo adoption is a solution to a long-lived problem. The buyside is increasingly dealing with fragmented liquidity and a need to execute transactions more efficiently. The report contends that by using FX algos, the buyside benefits from improved technology designed to address gaps in liquidity, data and other inefficiencies tied to over-thecounter markets.

In addition, the report highlights the emphasise on transparency embedded in the FX Global Code (FXGC). “It turns out, improved technology and greater efficiencies on the desk are not the only drivers of algo adaption. Principle 18 of the FXGC includes guidance for algo providers, shining a light on how algos are marketed and managed,” the report notes. The FXGC also emphasises transparency and disclosure requirements that are intended to help consumers of algos understand more thoroughly the nature of the tools they may (or may not) use. “It appears the more the industry knows about a product, the more likely they are to use and trust it,” the report authors suggest.

The report also questions whether the adoption of FX algos has now plateaued. “Because FX algo use has not achieved the same market share as in other asset classes, it is fair to ask if adoption is levelling off. Our data shows the answer is a resounding ‘no’. Trading in size in difficult markets require finesse and creativity, which algos can provide,” the report adds.


Furthermore, the report observes that creativity also comes into play when deciding which algo is most suited for the market conditions in which participants are trying to execute. This often requires sell-side guidance to help buyside traders use the optimal tool for the market conditions, the report notes, and warns that despite the popularity of algos, relationships still matter. “In equity markets, these challenges spawned ‘algo wheels’ something likely coming to FX markets,” the report adds.

The opportunity for additional algo growth sits squarely in other FX products, according to the report. The value of algorithmic execution in FX spot is mostly understood, and adoption will continue to rise, according to the report. “The ability of algo providers to apply this technology to other instruments such as NDFs represents an area of potential usage. To date, uptake has been limited,” the report adds.

Talk of the use of algos in certain FX swaps and options – particularly nonstandard dates – is probably sometime away. However, if the trajectory of electronic trading and algo use gleaned from other asset classes is any indicator of the future of FX algo adoption, the prospects of broad adoption are very good, the report concludes. Bruel adds that while algo use in spot is certainly a well told story, the focus now is on some of the less automated instrument types, such as NDFs and FX options. “Dealers recognise that there probably will be demand going forward and we’re starting to see a lot of questions being asked around the ability to more effectively execute your NDF and your options trades, but we have yet to see a wholesale introduction of algos into those markets.”

Read the full report here: https://www. greenwich.com/blog/present-andfuture- fx-execution-algorithms