A new report from US-based research firm Aite Group predicts that the use of FX algorithms will double in the next two years.
The report – Algorithmic Trading in FX: Fad or Reality? – estimates that currently 7% of all FX trading is executed algorithmically, driven by both investment- and execution-based trading strategies. By 2010, Aite Group expects this to have grown to 15%.
In common with other asset classes, FX is experiencing a new trend: algorithmic trading strategies designed to capture execution opportunities in an increasingly automated and fragmented marketplace.
As a result, the report suggests that the development and marketing of third-party FX execution algorithms is on the rise and leading FX banks have found more opportunities in providing market aggregation, creating sophisticated order types and implementing smart order routing technology.
Aite Group interviewed 12 actively trading asset managers, hedge funds and proprietary trading firms for information regarding the overall development of the FX algorithmic trading marketplace.
However, the report does sound a note of caution. “Despite some potential pitfalls, most banks and broker-dealers are diving head-first into the FX algorithmic marketplace,” said Sang Lee, author of the report and managing partner with Aite Group. “Unfortunately for most of these players, the concept of ‘build it and they will come,’ might not actually apply when it comes to algorithmic trading in the FX market.”