Although Greg Wood, SVP, global industry operations and technology at the Futures Industry Association (FIA), says that technology is increasingly causing FX to trade in smaller sizes, he explains that experience in other asset classes shows that this doesn’t necessarily mean that liquidity is diminishing.
With more trading firms using algorithmic execution tools to slice up large FX orders into smaller amounts to reduce market impact, this could potentially create a cyclical pattern where the amount of small orders going through exacerbates the impact of larger orders, forcing firms to execute in smaller and smaller sizes.
“It is to a degree a vicious circle and to a degree we’ve seen it happen in other asset classes, such as futures and equities,” says Wood.
He explains that the use of algorithmic tools, such as VWAP or TWAP execution algos, has grown because firms want to follow a benchmark, are prepared to work an order over a period of time and because they want to minimise information leakage to the market place.
“What happens then is you do have smaller sizes being shown, but it doesn’t necessarily mean that there’s less liquidity in the market. There’s less displayed liquidity, but you also have a lot of people on the other side that are using these tools that once they see signals will then interact with it,” says Wood.
This is why, he says, that experienced traders in the futures markets say that when trading certain products they know that they can still get their order done even if they can’t see the liquidity on the screen when they first start executing the order. This is because they know that other firms are waiting for liquidity to come into the market before they interact with it, adds Wood.
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