TradeTech FX shines light on evolving industry

Stock market candle graph analysis on screen.

The fact that last week’s annual forex event was well attended may have had something to do with the choice of Barcelona as a venue, but more likely is testament to the current pace of evolution in this sector of the financial industry.

From a purely trading perspective, the instability of the global political environment is creating its own challenges, but much of the conversation in Barcelona was dominated by the underlying shifts in market structure. Regulatory forces driving increased transparency and a focus on execution quality, coupled with increased competition from new entrants, are forcing both buy and sell-side firms to review their trading strategies, counterparty choices and current technology. This is compounded by the shift over recent years by many investors to view FX products as a stand-alone opportunity for generating return, rather than purely to facilitate corporate activity or trade in other asset classes.

These factors, and in particular the focus on best execution, have helped drive the adoption of algo trading to the extent that around 20% of global FX trading is executed through broker algos. This in itself is misleading – as one of the major sell-side firms pointed out, for large size orders the proportion is actually much higher. Either way, algos are increasingly becoming mainstream, with Refinitiv reporting that the adoption of execution algorithms on their FXall platform was up 41 percent in the second quarter of the year.

Indeed, the large sell-side firms were keen to promote their algo offerings at the event, advocating the benefits of improved execution quality. However, there was some resistance from they buy-side who voiced a requirement for better education to help them up the learning curve on these new tools, and also greater transparency of performance. Cross-broker algo benchmarking is less developed than in the equity market, where third party tools such as TCA analytics and Algo Wheels have become prominent. With risk transferring to the buy-side in algo trades, independent performance benchmarking will become an essential requirement as the FX market continues to adopt advanced trading techniques.

Perhaps the big takeaway from the event is that as the market continues to automate it will force firms to revisit legacy technologies and tools if they are to compete effectively. Whether enabling rapid algo deployment, increasing the speed and efficiency of price dissemination (both to compete with peers and avoid adverse selection), or building value added data and analytics services for customers, firms will need to invest in a new breed of flexible, high performance and scalable platform technology. And with an increasingly competitive landscape the need to quickly onboard new customers and integrate their workflow will figure high on the agenda of sell-side bank CTOs and heads of trading.