Algo trading and interest in emerging market currencies will grow in 2017 driven by hunt for FX liquidity

Traders at across both buy and sell side are reporting that they plan to make more use of computer algorithms to trade FX in 2017 and are also setting their sights on traditionally less-traded currencies.

This matters. Foreign exchange – or FX – is the world’s largest and most liquid market, with around USD 5 trillion exchanged every day across borders.

FX underpins global trade and commerce, allowing countries, companies and institutions to trade, hedge and transfer risk.

Now a survey of over 200 FX trading institutions reveals that while 12% currently use algorithms, 38% plan to increase their use of algos in 2017.

JPMorgan believes 2017 is going to be “a watershed year for algo usage”.

In terms of currency mix, traders currently spend 70% of their time trading the major G10 currencies – including EUR, USD, GBP and JPY – and 26% in emerging markets.

This looks set to change in 2017 with 15% planning to increase their use of G10 currencies this year, with 32% planning to trade more emerging market* currencies as their liquidity continue to improve and they therefore become increasingly more attractive to trade.

So it’s no longer just about speed and a race to the bottom to be first in and out of the market – so called ‘bad algos’ beating everyone to the punchbowl.

The unifying theme of both the rise of the machines and the renewed interest in traditionally ‘less traded’ currencies is the search for liquidity in an increasingly fragmented and competitive market.

Algos can monitor and act across multiple venues, markets and currency pairs to flag opportunity or alert to risk.

Likewise, an uncertain macro-economic outlook plus improving liquidity makes trading in less-traded pairs much more attractive.

As the first signs of Donald Trump’s victory in U.S. presidential elections emerged the largest increase in currency pair activity was the U.S. dollar traded against the Mexican peso (USD/MXN), 63 times normal levels in the hour following the result.,

By way of comparison, spikes were also registered across the major currency pairs with input volumes ten times normal levels for EUR/USD for that hour, followed by USD/JPY and GBP/USD.

Turning to FX instrument type,40% of FX traders report that they plan to use more options in 2017, with a corresponding increase in cash, swaps and NDFs as hedging tools in an uncertain political and economic environment.

*On the whole at Chatsworth we’re not so keen on the term ‘emerging markets’ which is largely subjective and frequently inaccurate as many ‘emerged’ long ago.

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