Will the Diverse Forex Landscape Pave the Way for a Low-Latency Trading Boom?

With factors like geopolitics and globally varied monetary policies bringing increased volatility throughout forex markets, we’re seeing more traders look for opportunities within the FX landscape. Have varying fortunes in regions like North America and Southeast Asia shed new light on the importance of achieving low-latency trading? 

The second quarter of 2024 saw foreign exchange average daily volume (ADV) reach 1.1 million contracts, representing a 20% increase over the same period in 2023. This acceleration in trading activity recorded by the CME Group was driven by a rise in market volatility and higher hedging demand as geopolitical uncertainty impacted economies in varied ways. 

June 2024, in particular, saw an increase of 25% in trading, highlighting that currency volatility has strengthened over the summer months. 

Increases in volatility throughout forex markets can present traders with significant opportunities to cash in on rapid price fluctuations within currencies, particularly among those associated with emerging economies experiencing lower liquidity levels. 

However, these low-liquidity currencies can be highly competitive, underscoring the necessity of low-latency trading strategies. 

The Pursuit of Low Latency

Low-latency and ultra-low-latency (ULL) trading revolve around technology that’s capable of processing data inputs in a matter of nanoseconds. This costly measure can offer institutional traders the ability to frictionlessly identify and action trading opportunities that may only be available over a split second. 

While it’s certainly possible to identify opportunities on traditional exchanges, the risk of equitable access means that it’s only possible to get as close to trades as other participants using the platform. However, ultra-low latency solutions mean that professionals can move as fast as possible to boost their prospective returns. 

These latency-sensitive strategies leverage faster trades that provide more alpha, but processes are dependent on single-market situations where different tick-to-trade loops can be optimized within trading infrastructures.

The ability to react fastest to fleeting price fluctuations can be most profitable among traditionally volatile currency pairs, and technology is rapidly accelerating the capabilities of the world’s most resourceful institutions in terms of accessing these opportunities fastest through ULL. 

Accessing Volatile Currencies

Volatile currency pairs can hold value for institutions because their price movements are generally more dramatic than their less volatile counterparts. But this added volatility can be risky, particularly for traders who are slower to capitalize on movements. 

While volatile currency pairs are impacted by the same factors like interest rate fluctuations, geopolitics, gross domestic product, and wider economic strengths of various regions, their unpredictability means that they require more research and an eagle eye to determine movements. 

Another consideration to take is that more volatile currency pairs generally feature lower liquidity than other currencies, and this adds an extra level of risk for institutions to keep on top of. 

This means that capitalizing on some of the world’s more volatile currency pairs like AUD/JPY, NZD/JPY, and USD/ZAR shouldn’t be attempted on a whim, and access to the right tools to remove any speed bumps or barriers in the trading process should be prioritized. 

Today, leading iterations for low-latency trading can focus on a number of different strategies for reducing speed bumps in the trade execution process. Man Group, for instance, sought to utilize a multicast RFQ protocol to democratize open-source technology for predictable low-latency trading and the ability to take orders from upstream to compare against available liquidity in real-time. 

Leading prime solutions have the power to rapidly access global markets with performance in mind to provide fast market accessibility to hedge funds, family offices, and broker-dealers alike. 

Dangers of ULL and Liquidity

While the pursuit of nanosecond trading capabilities has become popular for many institutions seeking out opportunities in forex, research suggests that faster exchanges can promote zero-sum ‘duels’ between informed high-frequency traders (HFTs) that can result in lower liquidity. 

This speed-focused battle for rapid trading could see more institutions refocus their resources on investing in faster trading speed technology. Marginal delays in network connections between Chicago and New York have been found to improve market liquidity, suggesting that faster latency speeds are just one aspect of achieving more efficient trading strategies among volatile currencies. 

Can AI Improve Efficiency?

One of the best ways to manage efficiency in emerging currency markets is through developing a more robust research strategy with the adoption of artificial intelligence tools. 

Uniting AI and machine learning (ML) is set to become an essential consideration in improving decision-making, optimizing approaches, and adapting rapidly to changing market conditions. 

Machine learning can help institutions develop a level of predictive analytics that’s been impossible in earlier years with its ability to utilize satellite imagery for insights into crop performance or the monitoring of parking lots to determine consumer spending power in specific regions. 

These tools help institutions identify trading opportunities among volatile currency pairs by applying logic to anticipate their future movements. 

With the pursuit of ULL trading proving costly for institutions, tapping into the rapidly evolving AI and ML landscape could help uncover brand new opportunities more sustainably for traders. 

Capitalizing on Volatility

Low-latency and ULL trading can be a complex strategy for institutional traders to capitalize on when it comes to profiting from volatile currency pairs. As the appetite for these rare FX trading opportunities grows in 2024, more institutions are seeking out efficient ways to leverage trades faster. 

Competition to leverage faster trades is rife, and this calls for a more comprehensive strategy for institutions. Uniting low-latency prime services with AI insights could offer a more cost-effective and sustainable approach for currency trading moving forward. 

In a forex landscape that’s becoming more volatile due to geopolitics and monetary policy in 2024, there’s plenty of opportunity among emerging currencies. With the right strategy and access to analytical insights, ambitious institutions can be at the forefront of an evolving industry with plenty of opportunities for profitability.