<p>Early trading data
suggest institutional FX platforms have opened this year in better shape than
they closed in 2022.
Cboe’s
institutional spot FX platform reported a 17% increase in total trading volume
in January compared to the previous month, while Euronext’s trading volumes
were up by 9.5% over the same period. It was a similar story at FXSpotStream and
360T where average daily volumes were up month-on-month by 5.2% and 13.9%, respectively.</p><p>While some of this
increase can be attributed to lower trading activity in December as a
consequence of the Christmas and new year holidays, it is also a reflection of
positive indicators including more encouraging global economic data and
continued market volatility on the back of interest rate policies.</p><p>A number of market
participants agree that the most notable trend in the institutional FX trading
space currently is the continued adoption of algorithmic trading.</p><p>“Over the past
couple of years – and largely as a result of the coronavirus pandemic – uptake
of FX algos has increased dramatically with clients and dealers looking to
offset risk, access fragmented <a href=”https://www.financemagnates.com/terms/l/liquidity/” class=”terms__main-term” id=”47c3bef3-27ee-4953-8504-159e1b829b33″ target=”_blank”>liquidity</a>, and improve operational risk when
working from home,” explained John McGrath, the Chief Revenue Officer at <a href=”https://www.financemagnates.com/tag/BidFX/” target=”_blank” rel=”follow”>BidFX</a>.
</p><p>This growth has
been further accelerated by the commoditised nature of FX trading, which lends
itself particularly well to the rapid and widespread adoption of algos.</p><p>McGrath
estimated that FX algo trading now represents as much as 20% of daily spot
volume and said that this number is only going to increase as buy-side firms become
more comfortable and reap the benefits of using the technology.</p><p>“Another notable
trend is volatility, which goes hand in hand with the growing trend toward
algos,” he added. “The return of <a href=”https://www.financemagnates.com/terms/v/volatility/” class=”terms__secondary-term” id=”7fd330d9-8855-4c31-9770-cb52b328c117″ target=”_blank”>volatility</a> in the FX markets last year – driven
by factors such as unpredictable fiscal policy from the UK government – has
meant that algos will evolve yet again to become even more sophisticated.”</p><p>The impact of
volatility is reflected across an institutional client base that in 2022 was preoccupied
with regulatory changes and workflow efficiencies but is now more interested in
liquidity availability and data management.</p><p>According to
McGrath, while the impact of the pandemic continues to wane, the inflation
hangover continues to affect <a href=”https://www.financemagnates.com/tag/institutional-fx/” target=”_blank” rel=”follow”>institutional FX</a> trades.</p><p>“Central banks
began raising interest rates in 2022 to ease inflationary pressures, and it is
likely that this will continue as many are expected to raise interest rates to
their highest level in 15 years,” he said. “FX traders will be forced to adjust
their strategy this year as risk factors that haven’t been relevant for a
number of years come to the fore once again.”</p><p>The low-interest
rate environment over the past decade has limited the scope for big carry
trades based on interest rates or growth differentials. In this context,
volatility presents opportunities and has provided a much-needed lifeline for
institutional FX traders.</p><p>McGrath noted that
interest in the bilateral clearing of non-deliverable forwards (NDFs) has been
on the rise as institutional asset managers look to reduce the amount of margin
they need to post under uncleared margin rules.
</p><p>“FX is, after all,
a by-product for the real money asset management community,” he said. “As
opposed to trading currency markets for alpha, the vast majority of money managers
are looking to manage risk around their currency exposures.”</p><p>An <a href=”https://www.financemagnates.com/tag/lmax/” target=”_blank” rel=”follow”>LMAX</a> Group
spokesperson suggested growing use of algorithmic trading has been fuelled by the increasing
adoption of artificial intelligence and machine learning. She also suggested that cryptocurrencies have benefitted from positive risk sentiment in traditional
markets in the early weeks of 2023, producing an uptick in volumes as more
institutions see that asset class as a natural extension to FX trading.</p><p>This is reflected
in LMAX Group trading data, which indicates that daily trading volumes picked
up sharply in the second week of January following a relatively quiet period
from the middle of November.</p><p>Jamie Trickett,
the Global Head of GlobalLink’s FX trading platform product reckoned traditional voice relationships will remain important despite the growth of data-driven
technology solutions used to create automated trading models and observes that
institutional FX trading desks are evolving to become a hybrid of skillsets.</p><p>“Traders are constantly
looking for enhancements in the speed and efficiency of executing trades as
well as better and quicker access to liquidity, and, as a result, we are seeing
increasing demand for our automated and algo trading solutions,” he said.</p><p>Institutions are investing
heavily in technology to improve their trading process and data analysis. There
is also a drive from the buy-side to streamline how their systems are communicating
with one another as market developments force heads of desks to look at how they
are managing staff and systems to ensure they are fit for the purpose and efficient
across all asset classes.</p><p>“Smart trading
solutions with an advanced level of interoperability will help improve
efficiency and simplify FX trading workflows,” said Trickett. “Data offering
independent and unbiased views is critical for institutions to enhance their
ability to make more informed trading decisions.”</p><p>While increased
electronic trading expands the amount of data available to clients, they still face
the challenge of turning that large amount of data into actionable metrics to
improve their trading outcomes. This had led to increased demand for real-time
pre- and post-trade analytics to help traders achieve greater transparency in
their FX trading and achieve best execution.</p><p>Trickett
referred to a shift towards NDFs as well as options swaps from institutional FX
traders as well as increased interest in algo trading and electronic trading.
“We have seen an increase in automated trading volumes of 40% year-on-year,” he
concluded.</p>
This article was written by Paul Golden at www.financemagnates.com.
