Market for FX algos 'will look more and more like equities': report
Algorithmic trading has revolutionized equities and bond markets, making them more efficient, but also spreading fearover flash crashes. Now they may be headed for the less-regulated multi-trillion dollar foreign exchange market.
According to a report this week from Greenwich Associates, titled "The Evolution of FX Algos: From 'Nice to Have' to'Need to Have'", algorithmic trade execution in foreign exchange is set to rise in the next few years.
"Our research indicates that approximately 10% of all dealer-to-client FX volume is executed via algos. This pales incomparison to the equities market, where over half of all volume is traded via an algorithm. Despite this seeminglylarge gap, we anticipate that over the next few years, the market for FX algos will look more and more like equities,"the report said.
And even though buy-side investors still seems hesitant to pay a fee to use algorithmic execution, in the long-run, itwould actually lower their execution costs, according to the report.
But sudden selloffs, such as in equity markets this week, are often blamed, at least in part, on algos.
Does this mean currency players fear flash crashes in major currencies like the dollar . After all, currencies alreadyreact quickly to world events, if this was exacerbated by algos, selloffs could become more severe.
See:How trading at the speed of light exacerbates market drops (http://www.marketwatch.com/story/how-trading-at-the-speed-of-light-exacerbates-market-drops-2018-02-07)
There's certainly a chance, said the report's author David Stryker, a principal on the Greenwich Associates marketsteam. But as traders and risk managers become more sophisticated, those dangers may recede.
"I think participants in the FX market, and in markets more broadly, have taken lessons away from historical events,"Stryker said, pointing at the October 2014 surge in Treasury prices (http://www.marketwatch.com/story/why-its-so-hard-to-trade-a-treasury-bond-right-now-2014-10-29), which sent the yield on 10-year Treasury notes plunging, "and [they]are responding by building controls and protocols to prevent 'flash crash' like scenarios from occurring."
-Anneken Tappe; 415-439-6400; AskNewswires@dowjones.com