Increasing Popularity of Algo Trading in the FX Market

The Foreign Exchange market has come a long way from its early days of voice/telephone trading. Before the late 1980s, the FX market was primarily broker-dealer oriented, with most transactions taking place in the inter-dealer core. In the outer tier, transactions occurred between dealers and their clients with bid-offer spreads that were wider than those in the inter-dealer market. Calls for prices and transactions were carried out over the telephone, hence the name ‘voice trading’ for this era and the form of interaction with dealers.

In the early 1990s, electronic trading gained popularity, leading to the emergence of dedicated platforms and electronic communication networks (ECNs). Although ECN was already in use on stock exchanges in the 1970s, it was only later adopted by the FX industry. As we will see, the FX industry tends to lag behind equities in the adoption of certain technologies.

Shift towards Algo Trading in FX Market Accelerated by Pandemic and Remote Work

Today, the FX market is dominated by electronic trading, and we are witnessing a shift towards algo trading. While algo trading is not new, it has recently become more ingrained as a concept for participants in the FX industry. The COVID-19 pandemic has also accelerated the adoption of algo trading, as remote working has created a growing need for automation in trading.

Clients typically choose an algo strategy to achieve one of three objectives: to reduce market impact and save trading costs, to minimize market risk, or to maximize execution certainty. Traditionally, clients have used algo strategies primarily for large orders, but this trend is changing as the pandemic has made clients realize that algos can also be used for smaller-sized orders.

Liquidity-seeking algorithms are the most popular type of algo used in FX trading, according to a survey from Coalition Greenwich, used by 69% of respondents. Time-weighted average price and volume-weighted average price are the next most popular algos. However, there are many more types of algos available to FX traders, and they are not limited to just these few.

Why Using Algo Trading in FX?

Despite the growth of algo trading in the FX market, only 17% of FX traders surveyed utilize algorithms to execute trades, according to Coalition Greenwich. However, the survey also reveals that 69% of respondents believe that algo use in FX will increase in the future. The FX Global Code is expected to drive the adoption of algos in FX, and FxSpotStream is expanding its algo offering to support a growing number of hedge funds, asset managers, multinational corporations, and regional banks.

Where Is FX Algo Trading Today, and What Is Its Future?

In conclusion, the FX market has evolved significantly over the years, from voice/telephone trading to electronic trading and the current trend towards algo trading. The COVID-19 pandemic has accelerated the adoption of algo trading, and although it is still not widely used in the FX market, its growth is expected to continue in the future. FxSpotStream is leading the way in expanding its algo offering and making the usage of algos even easier through the use of HTML5 technology.

FxSpotStream has continued to expand its algo offer since early 2021. The recent extension of it to GUI aims to make the usage of algos even easier. The GUI is based upon HTML5 technology, which allows it to be launched directly from a browser without any need to download software onto a local PC/network.

The combination of algo functionality with the support for allocations means the FxSpotStream will be able to support a growing number of hedge funds, asset managers, multinational corporations, and regional banks.