TABB Group Says Rapid Rise in FX Algorithms is Driven by Investment Managers Seeking Best Execution across Asset Classes

New York, NY - 7 November 2007

No longer a phone-based OTC marketplace, the global FX markets are being transformed by the arrival of new players following a rapidly evolving path towards rules-based automated technology. Initiated by hedge funds searching for alpha and the demand for direct electronic access through their prime brokers to dealing desks at major global banks, asset managers are now bringing FX trading in-house to support best execution across asset classes, leading to increased demand for algorithms to more effectively manage execution costs and achieve alpha.

According to new research published by TABB Group, “FX Algorithms: Bringing Best Execution to the FX Markets,” less than one third of FX trading was executed electronically in 2000. Growing to 62% by the end of 2006, it will approach 80% by 2010. “With the continued growth in electronic trading and the fragmentation of FX liquidity, FX algorithms will become standard fare on desktops of buy-side and sell-side traders alike,” says Laurie Berke, TABB Group’s senior consultant and the report’s author.

TABB Group also expects average daily volume in spot, forwards and swaps trading will swell from $3 trillion to $5 trillion by 2010, growth that Berke explains is being fueled by five sustainable trends: globalization of the manufacturing and service industries; an easy-money environment leading to massive growth in investment capital into new markets and new currencies exposure; growth in hedge funds and alternative investment pools and their global search for alpha; exponential growth in credit and financial derivatives, with a coincident expansion in the need for hedging currency exposures; and the advent of continuous-linked settlement (CLS) and the near complete mitigation of FX settlement risks.

“Like equities, finding liquidity in the FX markets will become the name of the game,” says Berke. “Innovative sell-side firms and vendors in the equities and derivatives markets are bringing analytics, transaction cost measurement tools, rules-based strategies and algorithms to their traditional asset-management clients. On the buy side, traders will avail themselves of sell-side tools offered to help them find FX liquidity while preserving alpha and lower transactions costs.”

However, because not all dealers have not wanted to jeopardize their competitive advantage – some are reluctant to offer all the tools their clients need to improve trading capabilities – TABB Group identifies six solutions addressing traders’ needs: electronic connectivity and DMA to multiple venues; price aggregation across multiple venues; multi-asset execution management systems (EMSs) and order management systems (OMSs) to support FX alongside equities and derivatives; clean, historical market data; appropriate execution benchmarks; and rules-driven trading algorithms.

The TABB Group report examines how traders use advanced electronic and algorithmic tools to manage FX transactions, current changes in the FX marketplace and its future direction as well as the leading buy-side and sell-side players. It is based on in-depth discussions with professionals at large bank dealers providing streaming prices to clients & ATSs; ATSs about the type of order flow and liquidity providers using their alternative liquidity pools; multi-asset desktop platform vendors about how their clients use FX data, analytics and algorithms to more effectively execute electronically; and hedge funds and traditional fiduciaries in how they manage their FX trading—tools used, additional tools being considered and how they envision their use of DMA and algorithms in FX will develop.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development