TCA and best ex drives algo adoption in FX

MiFID II and the FX global code of conduct are expected to cause a surge of algo usage in FX markets.

An increased focus on best execution and the growing use of transaction cost analysis (TCA) could see increased algo usage in FX markets, according to research.

A paper published by Greenwich Associates predicts the use of FX algorithms will steadily increase over the next three to five years due to MiFID II and the FX global code of conduct.

Almost a third of the buy-side now use TCA as part of their FX trading strategy and with a large proportion of FX volume executable electronically, investors are turning to algos to improve performance.

Vice president of market structure and technology at Greenwich Associates and author of the report, Richard Johnson, explained FX traders are beginning to appreciate the value algos provide.

“Execution algorithms allow traders to automate their flow, intelligently access a greater number of liquidity pools, control market impact, increase spread capture, and minimise information leakage,” he added.

Other surveys have also predicted a surge in FX algo adoption. JP Morgan polled 200 institutional FX traders earlier this year and found 38% plan to increase algo usage this year.

Of those, 39% said they will look to use algos for options transactions and 30% said they will increase algo usage for swaps trading.