ALGORITHMIC FX TRADING
FX Algos - the smartest new kids on the block?
The world of FX algorithmic trading continues to develop on all fronts. On a technical level the algos are increasingly sophisticated as developers bid to match the market’s appetite for lower latency, better performance and more complex trading strategies. And on a commercial level, providers continue to offer new algo trading services. Nicholas Pratt canvasses a leading technology vendor and two leading FX banks to see what we can expect to see in the algorithmic FX trading space during 2012.
(OTC) derivatives market and the emergence of swaps execution facilities (SEFs) is likely to lead to a sizeable increase in algorithmic trading. And the FX market is likely to feature in firm’s algorithmically-driven multi- asset trading strategies. Tis last development invites comparisons between the algos developed for equities trading and those developed for the FX market. Tere are clear similarities, as can be seen by the commercial success of algo trading services that started off in the equities world and have been subsequently repackaged for the FX market. And given the relative complexities of the FX market structure, we may even reach a point
I 136 | january 2012 e-FOREX
n 2012 regulation is set to be more influential in the FX market than has previously been the case. Te continuing reform of the over the counter
where FX algos actually overtake those in the equities world in the way that they add precision to the equities marketplace.
Progress Software does not directly develop FX algorithms but provides the tools and technology for banks and other trading firms to do so. Generally, says Dan Hubscher, capital markets industry marketing manager, the algos are not developed in isolation but as part of an overall trading service that combines execution algorithms with liquidity aggregation and smart order routing. One trend that Hubscher has seen in the FX algo space is the increasing number of banks that are not just developing algos to sell to their clients as part of an execution service offering but also looking to use algorithms for their own internal use, something that is especially evident among the larger tier one banks. “Te internalisation enables banks to lower their execution costs through internal crossing and matching of client orders. For example, when a number of orders come in, instead of sending a second order to be executed externally, you could amend an existing order by crossing it internally. Taking a real- time view of all your positions is key to achieving this.
Hubscher is also witnessing an increased use of FX algos for cross-asset trading, especially where FX is one leg of a multi-asset trade. Internalisation is also a factor in this regard. “Many banks will try to execute
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