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Algo trading on the rise in Asian FX markets – First Derivatives

First Derivatives (AIM:FDP.L, ESM:GYQ.I), a leading provider of software and consulting services to the capital markets industry, says algorithmic and high-frequency trading are rapidly increasing in Asian FX markets, following the trends set in equities.

First Derivatives released a whitepaper this week looking at FX developments in Asia and predicting future trends.

“There’s been a massive growth in interest in FX algo trading systems over the past 12 months,” said Rob Hodgkinson, Director, Asia for First Derivatives. “Electronic communication networks are moving into the region, and smaller players are following the lead of the big banks in looking at the new technologies on offer, as well as direct market access (DMA).”

The start of an Asian FX arms race mirrors the technological struggle that’s been going on in equities for the last few years, and brings with it similar concerns and opportunities.

“FX market participants have the same concerns as participants in other markets,” he said. “’Rogue’ algorithms, fragmentation and the pressures of being part of an increasingly complex and competitive market are all upsets. But of course there’s opportunity in the changes as well.

“Clearly there are distinguishing features in FX – primarily the huge size of the market which dwarfs equities,” said Hodgkinson. “While Asia will probably never have its own unified FX exchange – the current OTC model offers too much profit opportunity – there’s a growing trend towards internal matching, despite the increased risk that brings.”

Asian leaders in the FX arms race include Japan, China, Singapore and Hong Kong. While the automation of the market lags far behind that of equities, the next few years will definitely see big leaps in the speed of markets and the use of new technology for FX trading.

Firms looking at algorithmic strategies for the first time need to consider four main aspects – a technology platform; historical and ongoing data; risk management and transaction cost analysis (TCA), said Hodgkinson.

“Those who fail to take notice will surely be left behind,” he said.