A new report from Greenwich Associates claims that the adoption of algos by FX market participants has increased by 25% year-on-year.
“As FX market participants adopt sophisticated pre- and post-trade analytics enhanced by artificial intelligence and machine learning, the potential benefits of algo trading are becoming clear, and hedge funds and real money accounts are leading the charge,” says Satnam Sohal, principal at Greenwich and co-author of the new report.
“Technology and regulation are transforming FX trading,” says Frank Feenstra, managing director at Greenwich and another co-author of the report. “In the new world of best execution, algos offer clients an important tool to source liquidity and minimise costs.”
The adoption of algos by FX market participants has been widely predicted for some time now.
Indeed, Greenwich previously released a report in 2017 in which it similarly argued that an increased focus on best execution and the growing use of transaction cost analysis (TCA) were fuelling the adoption of algos in FX markets.
However, despite these publications, Greenwich says in a release accompanying its latest report that algo adoption rates in FX “have remained surprisingly flat over the last five years, even as algorithmic trades proliferated in other markets that have become largely electronic in nature”.
It claims that this time the predicted uptick in algo usage is actually appearing amongst FX market participants, with about one in five now trading via an algorithm. The report says that this statistic is consistent across the major markets of North America and Europe, and on the rise in Asia.
Significantly, the report does note that despite this uptick in algo usage, institutional and corporate FX customers have not shifted trading volume away from traditional voice trades to e-trading last year, even with new factors like MiFID II best execution requirements that favour electronic execution. In fact, Greenwich points out that the share of notional FX trading volume executed electronically has hovered around 80% for the past several years.