The report says algorithm trading constituted just 7% of trades at the end of 2010, while high-frequency traders, referred to as automated traders in the report, account for 29% of overall trade volume. The influx of HFT firms from the equity and futures markets, already accustomed to automated trading and looking for the sort of sophisticated execution tools they use in the equity markets, are likely to swell those numbers to 40% by 2014, the report says.
The trend has also stemmed from greater client interest in the algorithms provided by the big FX banks. These banks have been aggressive in their marketing strategies aimed at educating key clients, such as real-money managers and hedge funds, about the benefits such tools provide, both from a market transparency perspective and in analysing trading efficiency and costs per trade.
“The initial client scepticism regarding bank-provided algorithms has gradually given way to the view that these algorithms can be used to further improve overall operational efficiency and greatly enhance market transparency,” says Lee.
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| Source: Aite Group |
He adds that while algorithms are becoming increasingly attractive to investors, they also provide benefits to corporations, which will add to the long-run growth in this trading style. Companies such as Shell already use algorithms to execute their FX transactions.
The report says Barclays Capital has been the pioneer in FX algo trading, launching its system in 2007, followed by Credit Suisse and Citigroup later that year. Since then JPMorgan, Royal Bank of Scotland and Deutsche Bank have introduced algorithms for their clients.