FX to become new high-frequency battleground – Aite

High-frequency trading in the foreign exchange (FX) markets will rocket to 40% by the end of 2012 from with 25% at the end of 2009, according to a new study by consulting firm Aite Group.
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High-frequency trading in the foreign exchange (FX) markets will rocket to 40% by the end of 2012 from with 25% at the end of 2009, according to a new study by consulting firm Aite Group.

The study, ‘High-Frequency Trading in FX: Open For Business’, noted that as a result of the proliferation of latency arbitrage strategies, banks initiated a massive overhaul of their trading infrastructure, focused on reducing latency and developing more efficient pricing engine and internalisation capabilities, and cut ties with high-frequency firms that were deemed non-profitable.

However, since 2008, a new wave of high-frequency trading firms has established itself in the FX market. Also since this time, the study points out the greater adoption of bank-provided execution algorithms for FX, estimating that this will grow to 15% of daily FX volume in 2012 from around 4% in 2009.

The report observes that the presence of high-frequency trading flow in FX has been increasing every year, even during the financial crisis that stunted all markets’ growth in 2008 and 2009. Aite said this is demonstrated by the reduction in average trade size, to under $1.5 million in 2009 from over $3.5 million in 2005, and increasing trade volume to more than 1 million trades a day in 2009 from just under 200,000 in 2005.

The report concludes that the high-frequency growth

trend will continue, aided by the influx of next-generation equity and futures high-frequency trading firms looking to capture uncorrelated alpha in FX

and the new wave of high-speed trading firms established by FX quants and traders who have left large banks to seek new opportunities.

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