15 Percent of FX Trades Could be Completed With Algorithms by 2010

A new report from Aite Group estimates that 7 percent of all FX trading is currently conducted through algorithmic trading, driven by algorithms that represent both investment and execution-based trading strategies, and it could reach 15 percent by 2010.

In recent years, the FX market has witnessed the rapid growth of algorithmic trading strategies designed to capture execution opportunities in an increasingly automated and fragmented marketplace, according to Aite. The emergence of foreign exchange as a legitimate asset class has resulted in rapid adoption of electronic trading in the FX market. 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.

"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, "Algorithmic Trading in FX: Fad or Reality?"

"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," Lee adds

The report also 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.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio