It’s all go for algo! Next five years to herald multi-asset auto trading boom

Algorithmic trading in a setting outside of the interbank FX sector is a vast and rapidly growing methodology which certainly should be taken heed of within the non-bank retail electronic trading industry.

When thinking of algorithmic trading in the traditional sense, the somewhat pigeon-holed image of permanently employed bank staff occupying internal trading floors at Tier 1 banks from Canary Wharf to Wall Street, however, the reality is that the size of the market that is traded via algorithms is far more diverse than that.

The algorithmic trading market is expected to grow at a CAGR of 11.23% over the next five years according to research by Mordor Intelligence.

Traditionally, traders keep track of their trading activities and investment portfolio by using market surveillance technology.

Applications, such as algorithmic trading, have built-in intelligence to search for the opportunities that exist in the market, as per the yield and other criteria defined by the user. Factors, such as favourable government regulations, increasing demand for fast, reliable, and effective order execution, growing demand for market surveillance, and reducing transaction costs, are expected to spearhead the need for the algorithmic trading market.

Institutional investors and big brokerage houses use algorithmic trading to cut down on costs associated with bulk trading. In an environment in which the retail FX sector has become so highly competitive and margins are low due to the availability of several hundred almost identical systems due to the widespread use of off-the-shelf end to end solutions which effectively provide their lessors with simply a brand logo, thus little differentiation can take place.

In addition, traders are at the most astute level they have ever been, and now demand almost identical access to global markets as their institutional and professional counterparts, therefore by approaching the algo trading sector properly, several issues can be resolved.

The first issue of importance is that brokers are faced with the conundrum which is now well known, in that the cost of acquiring novice traders as first-time customers is astronomical at around $1500 per client, only to have a small deposit and low lifetime value, often resulting in a loss for the client and broker alike.

This can be reduced tremendously by not having a sales team to acquire new retail clients with no expertise only to find that they do not continue, or can be onboarded easily by over 1,200 rivals who all offer the same OTC instruments on the same platform.

By bringing onboard experienced traders who use automated systems, not only are brokers able to make good headway within the trend that is currently taking place in that algo trading is expanding rapidly, but also can make far more commission on longer-term trading accounts with higher frequency and better results, and not have to replace customers as there would be very little churn, and perhaps equally importantly, not have to dedicate huge resources toward educating traders who perhaps should not be trading in the first place, only to find that an initial $200 deposit turns into an immediate loss.

In the age of cloud deployment, the cloud-based algorithmic trading platforms are expected to play a significant role in the growth of the market, owing to various benefits, like a gain of maximum profits, as cloud-based trading solutions help traders to automate their trading process, easy trade data maintenance, cost-effectiveness, scalability, and effective management.

Cloud-based trading works on the cloud computing model that uses networks of remote servers usually accessed over the internet to store, manage, and process data. Attributed to the convenience of the cloud, traditional traders can deploy algorithmic trading in the cloud to check new trading strategies, backtest, and run-time series analysis, while executing trades.

Due to the lockdowns which have taken place leaving all businesses at the mercy of global government policy across many parts of the world, stock markets plunged in March 2020, triggering circuit breakers that halted market-wide trading several times.

Algo trading has been contributing to the market rebound after the March lows. Thus, algorithmic execution tools in foreign exchange increased significantly since March 2020. As per the latest Survey by JPMorgan, more than 60% of trades for ticket sizes bigger than $10 million were executed in March via an algorithm. This was compared to less than 50% a year ago. Hedge funds and real money accounts are leading the end-user industry. Additionally, a report on algorithmic trading by the National Institute of Financial Management, submitted to the Department of Economic Affairs in May 2010, found that algorithms accounted for half the orders on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

This has served to accelerate the move into algo trading for the increasing number of very highly skilled traders who now permeate forums such as Reddit and are able to influence the direction of their brokers. It is no longer the other way round.

On this matter, FinanceFeeds spoke today to Roman Nalivayko, CEO of TraderEvolution Global, one of the world’s only genuine multi-asset platforms which is deployed on a per-broker basis and covers every instrument on every venue globally in terms of listed derivatives as well as OTC products, giving genuine access to multiple global markets.

Mr Nalivayko explained, “There is a distinctive push toward sophisticated trading habits among retail market participants in areas that constitute the major financial markets.”

“Algo trading is therefore increasingly important and can be refined by brokers using the right solution. Access to listed markets as well as OTC markets will be an increasingly important matter as algo trading keeps getting popular, and therefore our platform is ideal for traders to approach all global markets in a future-proof way as our ability to adapt very quickly alongside the requirements of the market and our brokers are vital.”

“If you look at the direction that the Tier 1 banks are taking these days, especially the ones which have lost market share to non-bank market makers, they are now doubling down on algo trading products for the listed derivatives market. Citigroup, for example, was number 1 in the world in terms of FX order flow by market share for over 10 years, until XTX Markets, a relatively new company that stands tall over the vast banks, made a milestone move in taking the top place. If banks want to get this market share back, they will have to approach the market in a way that is conducive to attracting the good quality sustainable order flow” said Mr Nalivayko.

“Citigroup’s new solution which was launched a couple of months ago was specifically designed to trade futures markets and contracts in North America, Europe and the Asia Pacific and will be available to Citi clients to use on all major exchanges in those regions. The package of algorithmic strategies includes familiar benchmark execution strategies such as Time Weighted Average Price (TWAP) Volume Weighted Average Price (VWAP), as well as traditional execution strategies and order types such as market on close. However, the new trading software will also include smart execution capabilities including an implementation shortfall strategy.”

“In the non-bank OTC and listed derivatives trading sector, we need to take this matter very seriously as clearly it is the way in which our industry is heading. Multi-asset connectivity and availability of all global markets to retail traders is one important matter that has been necessary for some time now, however getting into the algo business is now becoming important too, and we can certainly provide the right environment for your broker to be able to access it” concluded Mr Nalivayko.

In May 2019, the FinanceFeeds Professional Trading Thought Leadership Conference, which was held at The Ned in London, co-hosted by Swedish brokerage Scandinavian Capital Markets, focused on detailed anecdotes from longstanding traders who have developed quantum scientific solutions, have invented their own algorithmic platforms and who manage very large sums of institutional investors’ funds.

Discussing the very poignant and necessary evolution that the FX industry needs and is absolutely ready for, senior leaders of the electronic trading sector engaged with hedge fund managers, institutional traders and movers and shakers from across the globe, looking closely at how to build a new and sustainable ecosystem for the advanced trader.

Data and AI were very much central talking points, and the panel discussion, led by four elite leaders of some of the world’s most important trading facilities, was highly interactive, looking at how to use data.

Many senior executives from within the FX and electronic trading industry attended, and were absolutely interested in the quality and talent displayed by algo traders with over 25 years of expertise, and certainly saw them as ideal clientele.

As we continue to refine our technology-led and cutting edge industry, algo trading is certainly a sector worthy of absolute note.