Algorithmic Trading in FX: Fad or Reality?

Boston, MA, September 2, 2008 – A new report from Aite Group, LLC examines the use of algorithmic trading in the foreign exchange (FX) markets. The report looks at the changing market reality of the FX market, assesses the potential for growth in the adoption of FX algorithmic trading, and identifies possible pitfalls. Aite Group interviewed 12 actively trading asset managers, hedge funds, and proprietary trading firms to glean information regarding the overall development of the FX algorithmic trading marketplace.

In recent years, the FX market has witnessed the emergence of a new trend in electronic trading: algorithmic trading strategies designed to capture execution opportunities in an increasingly automated and fragmented marketplace. Hedge funds have led the way thus far, developing their own algorithms. However, while the development and marketing of third-party FX execution algorithms is on the rise, leading FX banks have found more opportunities in providing market aggregation, creating sophisticated order types, and implementing smart order routing technology. Aite Group estimates that approximately 7% of all FX trading is currently conducted through algorithmic trading, driven by algorithms that represent both investment and execution-based trading strategies. This number could reach 15% by 2010.

"Despite some potential pitfalls, most banks and broker/dealers are diving head-first into the FX algorithmic marketplace," says Sang Lee, managing partner with Aite Group and author of this report. "Unfortunately for most of these players, the concept of 'build it and they will come,' might not actually apply when it comes to algorithmic trading in the FX market."

This 21-page Impact Note contains 16 figures and three tables. Clients of Aite Group's Institutional Securities & Investments service can download the report.