Sang Lee Managing Partner of The Aite Group
Sang Lee Managing Partner of The Aite Group

Algorithmic Trading in FX: Fad or reality?

In recent years, the FX market has witnessed the emergence of a new trend in electronic trading: algorithmic trading strategies designed to capture execution opportunities in increasingly automated and fragmented marketplace. This article examines the changing market reality in the FX market, assessing the potential for growth in adoption of FX algorithmic trading, as well as identifying possible pitfalls.

Defining the market Before delving into the analysis of overall algorithmic trading adoption in the FX market, it is important to acknowledge that there are clearly two different types of algorithms being applied in the marketplace: Investment algorithms. This type of algorithm has been created to determine which currency pairs to trade, given historical and real-time data analysis, and ultimately generates a signal to trade. Investment algorithms help firms decide what and when to trade. Most of the active black-box trading firms in the FX market rely on investment algorithms to generate trading signals so that automated trading can occur in milliseconds to capture alpha. Execution algorithms. This type of algorithm has been developed to determine how and where to trade, typically focusing on achieving efficiency. Basic examples of execution algorithms in the equities market include VWAP, TWAP, arrival price, participation, and more. In recent years, firms have focused on developing more...continued

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