FX Algos – Low Buy-Side Adoption, Big Market Potential

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Although algos have been almost universally adopted by the sell-side, Greenwich Associates has published a new survey which shows that only 37% of FX market participants (buy- and sell-side) in the US and Europe use algorithmic trading. Of those that do, only 22% of their overall volume is traded using algos.

By comparison, almost half of all equities trading volume (46%) is now executed through either direct market access (DMA,) smart order routing or algorithmic trades.

Respondents comprised 78% buy-side and 22% sell-side market participants. The survey was conducted before the volatility caused by COVID-19, which has undoubtedly increased use of algo trading (at least in the short term). Whether this results in a structural change in levels of adoption remains to be seen.

Greenwich highlights several reasons for the relatively low levels of uptake in FX, including the lack of trade disclosure requirements in FX which results in there being no universal data on pricing and execution that inform algorithms in equities. Also, as many FX trades are not to generate alpha, this limits the use of algo trades. Looking a bit deeper, less than half of FX traders use benchmarks to measure trade performance, and fewer still use TCA systems that have served as an accelerant for algos in other asset classes.

Looking to the future, Greenwich expects algo trading to become a mainstay in FX, due to the size of the market and how their potential use for large trades, which are still executed by voice.

"Given the potential stakes, it is only a matter of time before issues of data scarcity and other hurdles are addressed and algorithms take on a central role in FX trading," said Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology. "The fact that traders see algos as effective tools for both large trades that need to be worked over time and big trades that need to be executed quickly show how impactful algorithmic trading will ultimately have in this market."

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