Thursday, February 8, 2018 Stamford, CT USA — Approximately 20% of institutional foreign exchange trading volume is now executed via algos, and FX is likely to move steadily in the direction of equity markets, in which “algos” account for more than half of trading volume, according to a new report from Greenwich Associates. 

Foreign exchange has long been one of the world’s most liquid and electronic marketplaces. Recognizing the increasing popularity of algorithmic trading among FX users, Greenwich Associates conducted a Q3 2017 study of 79 traders at hedge funds, asset managers, corporations, and other institutions in the United States and Europe to see how/why they were using algos, and what impact algos were having on their trading operations and outcomes. One key result: Approximately 60% of respondents say algos have materially reduced the overall cost of trading FX.

“With all of the data available demonstrating the benefits and cost savings, the ability to execute a trade with an algo will soon become a ‘need’ as opposed to a ‘nice to have’,” says David Stryker, Principal with the Greenwich Associates Markets team and author of the report The Evolution of FX Algos: From "Nice to Have" to "Need to Have".

The new report takes a deep dive into the world of FX algos, examining the most common types of algorithmic strategies used by institutions, the reasons why traders use algos, and the criteria used by buy-side traders in selecting an algorithmic trading strategy. The report analyzes how traders are employing algos, how fees impact their decision-making, and what steps institutions need to take to start using them. In addition, the report addresses the question of why algo use hasn’t grown even more rapidly in FX and identifies some of the key barriers to adoption. 

After assessing all these factors, Greenwich Associates projects that algorithmic trading will continue to proliferate in global FX markets. “With the push from regulators, as well as best-execution committees and policies, traders are going to need to reduce costs while maintaining (or improving) the quality of the execution,” says David Stryker. “Algos help with both.”