The FX Algo Wheel, is it wheels up and ready to take flight?

by David Catterick, Sales Director, BidFX Australia

To most multi-asset dealing desks, the concept of an algo wheel isn’t too uncommon, particularly in Equities where it is widely used. Conversely, adopting algo wheels is still relatively uncommon within the world of FX, unlike equities, where algo flow represents a large part of the asset classes’ global volume. However, things are changing rapidly due to external factors such as the coronavirus pandemic, which has been a game changer for FX algo adoption with clients and dealers looking to offset risk, access fragmented liquidity, and, importantly, improve operational risk when working from home. It is estimated FX algo trading now represents approximately 10-20% of daily spot volume 1, and this number is clearly only going to increase as buy-side firms become more comfortable and reap the benefits of using algo suites. As this adoption and sophistication increases so does the innovation and technology behind the workflow. 

Unsurprisingly, hedge funds have been ahead of the curve in embracing automation, API trading, vendor-based orders, and LP algo wheel functionality. What was a Hedge Fund led trend is now being firmly driven by the Asset Management community as they begin to implement FX workflow improvements and efficiencies to free their dealers up from the more repetitive, less value add orders that can take up valuable time yet add little to the outcome of the order execution.  This allows buy-side dealers to focus on the more significant, tricky orders where effort must be spent to minimize market impact and achieve optimal execution.  With improvements in vendor technology, setting up and maintaining conditions to route low-touch orders is now a simple enough task and doesn’t require a degree in coding to set up.  In most cases, these simple tasks can be handled by the buy-side dealer themselves via an intuitive GUI.

David Catterick, Sales Director, BidFX Australia

This embracing of workflow technology on the buy-side has also now led to many global institutions implementing an algo wheel and utilizing TCA/LPA (Liquidity Provision Analytics) to monitor and assess the LP’s algo performance. This needs to be carried out on a continual feedback loop.  To achieve this there needs to be a significant number of “apples for apples” criteria to be compared, for example, time of day, order size, currency pair, and algo type selected.  Once established and enough data is collated (TCA), the feedback loop continues and helps a buy-side firm work with their LPs to improve algo efficiencies. It could also lead to other algo providers entering the wheel if performance is unsatisfactory. 

With BidFX’s LPA, which is designed to improve traders’ pools of liquidity through analytics on their pricing from LPs, and quantities, traders can now enhance their decision-making in the algo wheel so that it’s optimally configured. 

In conclusion, setting up an FX algo wheel is no longer a heavy lift; technology has evolved such that the benefits of the workflow improvements outstrip the initial planning effort that it takes to implement.  The possibilities are endless; it will be interesting to see how FX algo wheel adoption occurs over the coming years.

1 BIS Survey – FX execution algorithms and market functioning

 

Read this next

Retail FX

Banxso announces 8.7% interest rate on deposits in South Africa

“With Banxso, they can enjoy the benefits of both worlds – earning competitive interest and having the freedom to trade, all within the same platform.”

Industry News

FINRA to publish transaction details in U.S. Treasury securities

“Consistent with our longstanding practice, FINRA is introducing greater transparency in a calibrated and careful manner, benefiting liquidity and resilience in this critical market while also mitigating potential information leakage concerns.”

Institutional FX

OpenYield launches “cheap and easy” fixed income trading for brokers

“We’re on a mission to make bonds cheap and easy to trade, and are excited about the opportunity to build generational capital markets infrastructure.”

Digital Assets

Sumsub and Mercuryo publish a guide for VASPs: “Mastering Travel Rule Compliance”

“At Sumsub, we’ve concentrated our efforts on filling the gap in understanding the complexity of Travel Rule regulation and helping organizations find the best solution to stay safe and compliant while minimizing costs and avoiding potential risks of non-compliance. This guide we created with Mercuryo, our trusted partner, is the ultimate navigation tool all VASPs can consult.”

Digital Assets

Bitget Wallet Leads with Record Swap Volume & New Crypto Innovations

This week, Bitget Wallet achieved a milestone by surpassing Metamask with a record 388,757 Swap order transactions, securing the global lead. The significant 7-day trading volume, almost 68,000 more than its rival, underscores its liquidity and user trust. This robust activity signals Bitget Wallet’s prominent role and reliability in the dynamic crypto market.

Digital Assets

Embarking on a Digital Currency Journey

Imagine you’ve stumbled upon a treasure map, leading you to untold riches hidden in the vastness of the internet. Instead of gold coins and jewel-encrusted goblets, this treasure comes in the form of digital currencies, the modern-day loot coveted by many.

Reviews

Traders Union Experts Share The Trading Analyst Review For 2024

Navigating options trading in rapidly shifting markets poses a considerable challenge. This is where options trading alert services become invaluable. They aid traders in keeping abreast of evolving opportunities and market trends. In this assessment, Traders Union experts scrutinize The Trading Analyst alert service to ascertain its efficacy. 

Digital Assets

BlockDAG’s Presale Achieves $9.9M: Aiming For A 5000-Fold ROI As Cardano’s Price Rises And Fantom Launches Sonic

Explore Cardano’s surge, Sonic’s efficiency, and why BlockDAG’s growth makes it the top crypto choice. A deep dive into the future of blockchain investments.

Digital Assets

US, UK probe $20 billion Tether transfers tied to Russian exchange.

U.S. and UK authorities are investigating the movement of $20 billion in the USD-pegged stablecoin tether (USDT) through Moscow-based exchange Garantex.

<