Algorithmic Trading in the Global FX Market

Abstract

As the role of hedge funds in the foreign exchange market continues to grow, algorithmic trading and technology are shaping the future of the market. A White Paper released by FXall, the world's leading online foreign exchange platform, examines how the technology solutions and services provided by foreign exchange Electronic Communications Networks (ECNs) are evolving to meet the needs of this growing and rapidly developing market. The rise of hedge funds and algorithmic trading in FX is a key trend identified by the Bank for International Settlements (BIS) in the preliminary results of its latest survey announced on 25 September. The BIS reported that the FX trading volumes of financial institutions grew by 30% compared with 11% for reporting dealers since its last survey in 2004. FXall's White Paper, entitled ‘Algorithmic Trading In The Global FX Market: The Need For Speed, Transparency And Fairness‘, looks at the implications of this trend for the future of FX trading in terms of the ever more complex technological needs and increasing discernment of market participants in selecting trading venues. The article highlights how the foreign exchange market is following the trend that is now well advanced in the equities market, where the use of automated, complex trading strategies has helped fuel the rise of ECNs. Hedge funds are successfully applying algorithmic strategies to FX trading to generate alpha, using many of the same methods they have applied in the equities market and other asset classes. This trend has injected more liquidity into the FX market — the world's largest financial market. The market is further evolving in 2007 as participants seek the optimum technology to implement their strategies, fuelling the growth of FX as an asset class in its own right.

TOPICS: Exchanges/markets/clearinghouses, risk management, global