Institutional investors are becoming more sophisticated in their use of electronic trading tools for FX, with almost half opting to use algorithms to execute trades in the asset class, new research has indicated.
The findings are part of a survey from real-time analytics provider Streambase Systems, which found that 48% of respondents used FX algorithms in 2012, 14 percentage points higher than 2011. Moreover, only 25% of buy-side traders questioned either do not use algorithms or have no plans to do so in future.
Minimising market impact and reducing execution costs were the main reasons for using algo strategies, according to all types of market participants.
Liquidity aggregation algos were the most commonly used among both the buy-side (54%) and sell-side (64%), followed by floating rates strategies, used by 39% of buy-side traders and 51% of sell-side firms.
Streambase’s survey, which spanned 240 institutional FX traders primarily located in EMEA and the US, also identified low-latency data delivery as the main challenge in achieving best execution for algo trades. The ability to integrate different feed formats from multiple liquidity providers was also recognised as a particular challenge, in addition to locating historical data for backtesting purposes. Almost two-thirds of both buy- and sell-side firms developed their own algorithmic strategies in-house.
In terms of trading systems, the use of multi-bank platforms grew to 69% in 2012, from 52% in 2011, while single-dealer platform use increased to 51% from 44% over the same period. However, 14% of those surveyed were unhappy with the prices they received from multi-bank platforms.
“The FX industry is forced to maximise profitability within narrower margins as a result of low volume and volatility,” said Sang Lee, co-founder and managing partner at consultancy Aite Group. “The increased adoption of multi-bank trading platforms and algorithms indicate buy-side firms’ demand for control and transparency. The ability to provide value-added services, including customised algorithms, real-time liquidity and risk analytics will help sell-side firms to stay competitive.”
“I think we will see firms be more agile and efficient by leveraging technology to allocate resources and creating value for customers,” added Richard Tibbetts, CTO at StreamBase Systems. “The challenge is to make the architecture flexible and scalable enough to manage multiple liquidity providers, develop and deploy algorithms and risk metrics according to changing market conditions.”