Algorithmic trading comes of age

During the peak volatility days of August 16 and 17 a number of the high-volume platforms experienced record days, despite a re-channelling of some banks' liquidity to single-bank systems. Electronic communications network Hotspot FXi, for example, reported the highest single-day volume on August 16, of $50 billion, led by client-to-client trading activity.

The heightened liquidity over the platform demonstrated buy-side traders' role as market-makers as well as takers, as some banks focused on pricing on their proprietary platforms.

Officials at the platform said that, as market volatility had increased, client-to-client matches rose from their usual 40-50% share of total volume to above 60% during the week. On August 16, client-to-client matches accounted for 66% of total platform volumes. The platform said liquidity came from diversified sources, including market-maker banks and client liquidity providers, both programmatic traders and natural buyers and sellers.

But the proportion of support algorithmic traders are bringing to the e-FX market cannot be ignored.

According to statistics from Icap-owned spot broker EBS, for example, the volume generated from algo trading over the platform currently stands at between 35% and 40%, up from approximately 16% in 2006. These statistics bear significance when taking into account the fact that EBS averaged daily volumes of $182 billion in 2007, an increase of 28% on $143 billion in 2006. The broker itself cited volatility in the currency markets and increased algorithmic trading activity as contributers to growth.

Not only is algorithmic trading offering the benefits of expanding traded volumes but it is also enabling better and more intelligent risk management. As Roger Hawes, London-based global head of spot FX trading at the Royal Bank of Scotland said the liquidity squeeze and trading volume peak of August 17 tested the trading skills and capabilities of banks and non-banks alike.

He said players that had the necessary risk appetite and had appropriately invested in building their technology would be able to draw confidence from these experiences and move on. Those that hadn't, on the other hand, will be missing out.