Increased volatility highlights resilience

In what has been the end of historically low levels of volatility, many traders have rightly said that the price action last week in particular hadn't been seen in a long, long while. The difference now is the overall resilience and transparency in the market brought on by electronic trading.

The yen's rally at London open on Thursday for example, saw a mad gap where spreads widened by 150 points to a maximum of 200 points. Obviously this was quite a significant move but, as one trader said, you knew why that was happening. He said this was because a number of banks have the same stop losses in the same place, while some of the move was driven by the options market. "So you knew why things were going through your books," he said. This differs from the past, where a sharp move would have resulted in an easy mark-up of 100 points by banks to clients point blank.

Meanwhile, some of the electronic communications networks (ECNs) have seen steady volumes going through, with Hotspot FXi reaching a record on Thursday. What's noteworthy is the rise in client-to-client trading volumes as part of the overall volumes on the platform. This marks a significant proven development in the market, after much debate over the evolving role of the buy side in the FX markets. We've heard plenty these past couple of years about the buy side increasingly taking the role as market-makers and not just price-takers.

Most of this type of activity comes from algorithmic traders, which illustrates quite an interesting point. At our FX Week USA congress in New York last month, Misha Malyshev, head of high-frequency trading at Citadel Investment Group, cited the benefits of algorithmic trading in FX markets.

He began by saying algorithmic trading smoothes the market by alleviating market fragmentation. This is because the typical algorithmic player is technologically sophisticated and connected to multiple ECNs. As such, the algorithmic community provides seamless liquidity 'translation' across the overall market. So it seems.

With algorithmic trading behind much of the growth in the market, you can't argue that it's not helping dealers manage their risk.

Saima Farooqi, Editor