Why FX Algo Execution is The Future

[forex4you]

Why FX Algo Execution is The Future

<p class="MsoNormal">Algorithmic trading has
evolved in sophistication since its beginning.</p><p class="MsoNormal">For example, order
slicing techniques (dividing a large quantity order into multiple orders, known
as "child orders") have evolved from very simplistic approaches (time based or
a number of divisions) to more complicated approaches, which dynamically adapt
to market conditions. </p><p class="MsoNormal">As BIS (Bank for
International Settlements) stated in their "FX execution algorithms and market
functioning" report, historically there are three generations of algorithms:</p><ul><li>      First-generation
algorithms: The pioneering EAs generally had simple mechanical rules and were
modelled after early algorithms in the equity market. The earliest FX EAs
sought mainly to automate traders' practice of splitting parent orders into
child orders and followed strictly predetermined execution schedules. Their
lack of sophistication generated distinct trading patterns that were easy for
other market participants to detect. </li><li>      Second-generation
algorithms: In subsequent iterations of FX EAs, providers strove to develop EAs
that reduce market impact and avoid leaving distinct trading patterns by
introducing some randomization in the size and timing of child orders.
Nevertheless, these algorithms remained essentially on statically defined
schedules, and continued to be susceptible to detection through the use of more
sophisticated forecasting and pattern recognition techniques. </li><li>      Third-generation
algorithms: By the mid-2010s, FX EAs started to use complex statistical models
to drive algorithmic decisions and react more dynamically to changes in market
conditions, with the aim of further reducing market impact and signaling. These
EAs leveraged the increasing availability of real-time market data and
computing power to assess market conditions.</li></ul><p class="MsoNormal">Event Driving Market
Volatility</p><p class="MsoNormal">One of the reasons
helping FX Algorithmic trading grow in usage was the MiFID II initiative from
2018. </p><p class="MsoNormal">It has unbundled
research from trading commissions. </p><p class="MsoNormal">Together with the
growing demand for automation, it has led to a quick increase in the use of
execution algorithms. </p><p class="MsoNormal">It is being estimated
that the popularity of algo trading should grow more in the nearest years. </p><p class="MsoNormal">Demand for algorithmic
trading solutions should grow, with trading volumes and volatility levels
remaining high fueled by several problems, such as  of e
and a shift in the interest rate hikes policy of global central banks.</p><p class="MsoNormal">Interest rates are the
single most significant factor influencing the forex market. </p><p class="MsoNormal">They are the source of
the biggest long-term changes in trading direction and the rate decisions alone
are often the most important macroeconomic events of the week, driving daily
market volatility to extreme levels.</p><p class="MsoNormal">In September, central
banks overseeing eight of the 10 most heavily traded currencies delivered 550
basis points of rate hikes between them. </p><p class="MsoNormal">This way they brought
the total volume of rate hikes in 2022 from the G10 central banks to 1,850
basis points.</p><p class="MsoNormal">FED hiked interest
rates by 75 basis points for a third straight time. Also, the Bank of England
raised the rates. </p><p class="MsoNormal">The European Central
Bank and Bank of Canada raised their benchmark rates, and policymakers in
Switzerland put an end to a decade of negative interest rates in Europe.</p><p class="MsoNormal">Why Using Algo Trading
in FX?</p><p class="MsoNormal">Basically, clients have
one of the following objectives when selecting an algo strategy: </p><ul><li>to reduce market
impact and save trading costs,</li><li>to minimize market
risk,</li><li>to maximize execution
certainty.</li></ul><p class="MsoNormal">Traditionally, clients
have been using algo strategies mostly in the case of large orders.</p><p class="MsoNormal">A Coalition Greenwich
2021 Market Structure & Trading Technology Study revealed that according to
46% of responders, algo trading is a "must do" in case large orders worked
overtime. </p><p class="MsoNormal">According to another
31%, it is very probable thing to do. Also, the large orders that need to be
executed quickly are the situations to consider algos. </p><p class="MsoNormal">According to 46% of responders,
it makes a lot of sense to use algos in such situation and 15% of responders
are certain than algos should be used here. </p><p class="MsoNormal">In case of small
orders, a staggering 75% answered, that usage of algos would be not likely at
all.</p><p class="MsoNormal">These are most often
mentioned reasons to use algo trading and most popular approaches, but there
are much more, and FX traders are not limited to only these few.</p><p class="MsoNormal">FXSpotStream offers its
clients 70 different algos and more than 200 parameters within those
strategies. </p><p class="MsoNormal">Just recently, <a href="https://www.fxspotstream.com/algos-and-allocations" target="_blank" rel="nofollow">FXSpotStream</a> extended its LPs' algo
offering from its original API channel to its GUI. </p><p class="MsoNormal">Since launching algos
in July 2021, it has supported over $19 billion in algo volumes across 46
currency pairs in spot and NDFs, from eight clients accessing 26 different
strategies from 10 LPs.</p><p class="MsoNormal">FxSpotStream has kept expanding
its algo offer since early 2021. The recent extension of it to GUI aims to make
the usage of algos even easier. </p><p class="MsoNormal">The GUI is based upon
HTML5 technology, which allows it to be launched directly from a browser
without any need to download software onto a local PC/network.</p><p>The combination of the algo functionality with the support for allocations means <a href="https://www.fxspotstream.com/algos-and-allocations" target="_blank" rel="nofollow">FxSpotStream</a> will be able to support a growing number of hedge funds, asset managers, multinational corporations and regional banks.</p>

This article was written by Finance Magnates Staff at www.financemagnates.com.

Source: Why FX Algo Execution is The Future