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Foreign Exchange

E-trading rises to more than 60% of global FX volume

Electronic FX volumes rose above 60% of the total global FX market for the first time last year, according to Greenwich Associates’ foreign exchange services study.

The report, which tracks volumes among 1,632 corporate and institutional customers, showed electronic FX volumes increased 23% from the third quarter of 2010 to the same period last year, outstripping the 15% rise in total activity. That raised the share of the market traded electronically from 57% to 61%. America led the expansion, with a 47% rise in electronic trading, while volumes grew by 20% in Europe and 22% in Asia Pacific.

The report also highlighted the return of retail aggregators, which saw large declines in activity in 2010. Last year, volumes executed electronically by retail aggregators increased by 43%, mirroring the increase in overall volumes generated in the sector and serving as one of the main drivers of the general recovery in global volumes.

Greenwich also predicted large growth in algorithmic trading.

“The FX market has the reputation of being perhaps the world’s most liquid and one of the world’s most efficient marketplaces,” the report states. “It has also become one of the most competitive.

“As increasing amounts of business flow to multi-dealer platforms, banks find themselves in a race to get prices quoted on these systems and to find ways of differentiating themselves from competitors. Many banks are looking to one tool they think will help them better compete: algorithmic trading.”

Greenwich said the survey showed just 8% of global FX market participants used algorithmic trading strategies last year, and while that was up from 6% in 2010, it was clear that these strategies had failed to get much traction market-wide.

However, Greenwich said the survey did show algorithmic trading was beginning to catch in certain segments of the market.

For example, the use of algorithmic trading strategies increased to 16% in 2011 from 12% in 2010 among the market’s biggest and most active traders – those generating more than $50 billion in annual FX trading volume.

Furthermore, the use of these strategies increased to 12% from 8% among market participants in the UK and to 12% from 10% among US participants, while 20% of hedge funds were using algorithmic trading strategies in FX, up from 14% last year.

Meanwhile, Greenwich said many of the banks it regularly works with are investing heavily in the development of algorithmic strategies for FX, and they expect this product to attract large levels of demand in the months and years ahead.

“As FX evolves into a mainly electronic marketplace, competition is taking place in milliseconds as opposed to minutes or hours,” says Greenwich Associates consultant Peter D’Amario. “In such an environment, algorithmic trading strategies will play a much bigger role for investors and banks.”

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