For those unwilling to accept any meaningful execution risk on their FX trades, trading on a risk transfer price with a dealer is the way to go – but there can still be a place for algos.
Despite broad acceptance that they introduce a measure of execution risk, as noted by a recent Bank for International Settlements (BIS) markets committee report titled FX Execution Algorithms and Market Functioning, market participants often reckon this downside is comfortably outweighed by the benefits.
Execution algos provide traders with more direct control & parameterization of their execution
“All traders need to understand the trade-off between reduced market impact and added time risk,” says Daniel Chambers, head of data and analytics at BidFX, an FX trading solutions provider.
“Execution algos provide traders with more direct control and parameterization of their execution.”
On top of that, end-users can in many cases tolerate much more variance than dealers, and can therefore take more time with execution, minimizing market impact and improving execution quality.
The trend towards a hybrid FX market structure has been going on for a number of years, with an increasing proportion of flow – mostly in spot FX – now traded with end-users taking more ownership of the execution risk.
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