Monday, June 13, 2016 Stamford, CT USA — Algorithmic trading is taking hold in foreign exchange—in part due to fallout from the 2013 FX “Fixing Scandal.”

Foreign exchange represents one of the world’s biggest, most liquid and most electronic marketplaces. But while algorithmic trading has become a standard in global equity markets, algos have been much slower to gain traction in FX. 

A new report from Greenwich Associates, FX Fixing Scandal Drives Adoption of Algos and TCA, shows that the proportion of volume-weighted FX trading executed algorithmically by algo-trading users has increased two and a half times in the past three years.

Hedge funds are leading the charge into algorithmic trading. In the U.S., hedge funds that use algorithmic trading execute more than three-quarters of their overall FX trading volume with algos. In Europe, that share is 55%.

Drivers of Algo Growth 
The overall shift to algorithmic trading has resulted from several factors. First, the algos themselves are getting better. With margins still constrained in equity electronic trading and the product often seen as commoditized, brokers have invested more in upgrading their FX algo suite. 

Secondly, with more electronic platforms and APIs available, there are more venues to smart route among and more data points to fuel algo development. Finally, and perhaps the biggest driver in Europe, was the forex collusion scandal of 2013/2014.

The same factors driving algorithmic trading usage are also driving increases in the use of transaction cost analysis (TCA) on FX desks. Algorithmic trading and TCA are still relatively new to the FX space, and as such there remain opportunities for brokers and technology firms to innovate and differentiate. The aftermath of the collusion scandal has added a level of transparency to the foreign exchange markets that will not simply dissipate.

“Going forward further enhancements to FX algorithms by banks and brokers will drive continued investor adoption. In conjunction with this, increased adoption of FX TCA will help traders and investors better measure performance gains from this change,” says Richard Johnson, Vice President in the Greenwich Associates Market Structure and Technology Group.