The foreign exchange markets, among the most active round the clock, are embarcing algorithms to help acheive best execution and grab alpha.
Execution algorithms are proliferating in global foreign-exchange (FX) markets, driven by strong uptake among hedge funds, market makers and speculators. Now, new research from Greenwich Associates shows that long-term investors corporate end-users are turning to algorithms in FX trading.
A new report from Greenwich Associates, Long-Term Investors Embrace FX Algos, shows how an increased focus on best execution and the growing use of transaction cost analysis (TCA) are fueling the adoption of algorithms in foreign exchange.
As a more diverse set of market participants competes for liquidity in currency markets, longer-term FX traders are beginning to appreciate the value that algorithms provide in terms of control, anonymity and performance, says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the report.
Algo Use on the Rise Among Investors and Corporates
FX algorithms are used by more than a third of the biggest institutional or real money fund managers active in global FX markets, and by almost a quarter of the biggest corporate FX traders (fund managers and companies generating at least $50 billion in annual trading volume).
Greenwich Associates expects algo usage to steadily increase over the next three to five years as pending MiFID II regulations and the FX Global Code of Conduct place even more emphasis on best execution and prompt more market participants to employ TCA and similar analytic tools.
TCA and algo usage often go hand in hand. If a trader uses TCA to help identify an improved trading strategy, they may well choose to implement the strategy using algos. Almost a third-31%-of institutional asset managers now use TCA as part of their trading process. With so much FX volume executable electronically, these investors are more frequently turning to trading algorithms to help them apply the insights provided by TCA and, ultimately, improve investment performance. Execution algorithms allow traders to automate their flow, intelligently access a greater number of liquidity pools, control market impact, increase spread capture, and minimize information leakage, says Richard Johnson.
Algo Types, Styles and Selection Criteria
When it comes time for these users to select an algorithm, ease of use and access to quality liquidity are the most important criteria considered. The new Greenwich Report examines the other factors FX users consider when choosing an algorithm, and also provides a detailed breakdown of the different types and styles of algos used in FX.
