Increasing use of rules-based automated technology will result in as much as 80% of global foreign exchange trading being conducted electronically by 2010, up from 62% at the end of 2006, according to new research from analyst group Tabb.
No longer a phone-based OTC marketplace, the global FX markets are being transformed by the increasing use of algorithmic trading methods by investment managers, says Tabb.
Initiated by hedge funds searching for alpha and the demand for direct access through prime brokers to dealing desks at major global banks, Tabb Group says asset managers are now bringing FX trading in-house to support best execution across asset classes. This is leading to increased demand for algorithms to more effectively manage execution costs and achieve alpha.
"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.
"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," adds Berke. "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."
But, because not all dealers want to jeopardise their competitive advantage some are reluctant to offer all the tools their clients need to improve trading capabilities, says Tabb.
The research also predicts that average daily volume in spot, forwards and swaps trading will swell from $3 trillion to $5 trillion by 2010, fuelled by a number of factors including growth in hedge funds and alternative investment pools; exponential growth in credit and financial derivatives and risk mitigating settlement across time-zones.