TM FX: Algo Trading Hits 11 Percent and Expected to Grow

Electronic or algorithmic trading is fast becoming the norm in foreign exchange trading; much like it already is in equities. And algo usage is expected to climb even more in the future.

That’s some of the findings in a new report, FX Electronic Trading 2014 – Global Trends and Competitive Analysis, from Greenwich Associates. The consultancy also noted that demand for algorithms and regulatory complexity should drive trading business back to proprietary bank platforms. Recently, forex trading had been gaining ground among the multi-dealer trading platforms.

The report found that 11 percent of FX market participants now use execution algorithms for some portion of their trading – up from just 7 percent in 2012.

This report is based on the results of more than 1,500 interviews with buyside users.

Greenwich Associates projects that global use of algorithmic trading for FX will increase to 18 percent by the end of 2014 – a whopping 64 percent jump from the current adoption rate. Use among hedge funds and retail aggregators is expected to be significantly higher.

“This rapid growth in adoption will have a major impact on the market because algorithmic trading users are executing more than a third of their FX trading volume through them,” said Kevin McPartland, head of Greenwich Associates market structure & technology. “Hedge funds using algos execute even more volume through them, over 50 percent, and we expect that to only increase.”

Demand for broker-provided algorithms last year helped increase the amount of FX trading volume executed on single-dealer platforms for the first time since the financial crisis. Hedge funds moved particularly large proportions of their volumes to SDPs, trading 22 percent of their 2013 volume with SDPs, up from 7 percent in 2012.

While Greenwich Associates attributes some of the uptick in SDP volumes to buyside demand for algorithms, SDPs also received a temporary boost from regulations – particularly Footnote 88.

Footnote 88 is the requirement for MDPs to register as swap execution facilities. Mcpartland said that as a result of this registration mandate, more clients have moved back to SDPs as they look to minimize the impact of the new regulations on their trading process.

Despite market share gains by SDPs and some massive changes in market structure, the multi-dealer platform competitive landscape remained largely unchanged. Among MDPs, FXAll continues to have the highest market penetration among institutional investors, with 360T and Bloomberg rounding out the top three.