Rise of electronic FX trading won’t silence voice brokers
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Foreign Exchange

Rise of electronic FX trading won’t silence voice brokers

Electronic trading is set to account for an increasing share of the volume on the world’s $5.3 trillion-a-day FX market, but that does not mean the death of voice brokers.

That is the view of Aite Group consultancy, which believes the continued adoption of electronic trading will play a key role in fuelling the overall growth in the FX market.

The consultancy expects 70% of all trading on the global FX market to be executed electronically by the end of 2013, up from 60% at the end of last year.

“This reality does not predict the end of voice trading, however,” says Javier Paz, senior analyst at Aite.

“Typically, voice has a bigger role when large trades are being done.”

In addition, he notes, during times of severe FX market volatility, it is common for clients to rely on their relationships with banks to get much-needed colour as to where prices are headed and to get that via voice.

“This was certainly the case in 2009, when following the record volume of 2008, the dramatic dislocation of the general global economy created much uncertainty in the market place, leading to widened spreads and lower trading volume,” says Paz.

“During this time, reliance on high-touch, voice-driven trading became crucial for clients seeking to navigate market uncertainty.” 

Projected electronic trading in FX 

Automated trading is also on the rise, with Aite estimating that 40% of trading volume in spot FX is currently accounted for by high-frequency trading (HFT). However, unlike in the equities market, it is unlikely that automated trading could account for more than 50% of overall volume, the consultancy argues.

“The sheer diversity of FX market participants and their varied reasons for participating in the market would make it difficult for a single group of participants to overwhelm the rest,” says Paz.

“It should also be noted that at least half of the 40% HFT presence in the spot market is represented by banks themselves.” 

High-frequency trading in FX 

Algorithmic trading in FX is also increasing, albeit at a slower pace than in the equities market, according to Aite.

Long-established as standard practice among stock investors, algorithmic execution strategies allow computer-driven models to carry out trades on behalf of customers.

Algorithmic trading in FX was pioneered in 2008 by Credit Suisse. The Swiss bank’s advanced execution service group, building on expertise developed in the equities markets, launched the first suite of bank-provided execution algorithms designed for clients.

Paz says initial client scepticism regarding bank-provided FX algorithms has gradually given way to a view that these algorithms can be used to further improve overall operational efficiency and greatly enhance market transparency.

“The ability to analyse execution quality and the potential for conducting transaction cost analysis has also aided the push for greater adoption,” he adds.

“Unlike the equities market, adoption of algorithms in the FX market has not seen dramatic success. Adoption is taking place gradually.”

Aite estimates the adoption of algorithms in the FX market accounted for an estimated 15% of volumes at the end of 2012. The consultancy expects that to rise to 20% by the end of this year and to 25% by 2014.   

 Projected adoption of execution algorithms
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