Algorithmic trading strategies are taking hold in FX – a development that is providing a boost to proprietary bank trading systems that had been losing market share to multi-dealer trading platforms.
According to a new report, FX Electronic Trading 2014 – Global Trends and Competitive Analysis from Greenwich Associates, 11 per cent of FX market participants now use execution algorithms for some portion of their trading, up from just seven per cent in 2012.
This report is based on the results of more than 1,500 interviews with buy-side FX users.
Greenwich Associates projects that global use of algorithmic trading for FX will increase to 18 per cent by the end of 2014 — a 64 per cent 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,” says Kevin McPartland, head of Greenwich Associates Market Structure & Technology. “Hedge funds using algos execute even more volume through them, over 50 per cent, 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 (SDPs) for the first time since the financial crisis. Hedge funds moved particularly large proportions of their volumes to SDPs, trading 22 per cent of their 2013 volume with SDPs, up from seven per cent in 2012.
While Greenwich Associates attributes some of the uptick in SDP volumes to buy-side demand for algorithms, SDPs also received a temporary boost from regulations – particularly Footnote 88.
“The requirement for MDPs to register as swap execution facilities (SEFs) has driven more clients to SDPs as they look to minimise the impact of new regulations on their trading process,” says McPartland.
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.