Institutional FX trading mostly algo-based following 4pm fix scandal investigation – WSJ


The 4pm fix scandal probes have led to hefty fines for some of the world’s top banks and still have their repercussions regarding measures taken against individual traders and the way communication functions at the institutions involved in the scandal.

A report by the Wall Street Journal points to one more aspect in which the market rigging scandal has affected the Forex realm. This aspect is the balance between algorithmic and human trading, with the WSJ article noting that in the wake of the rigging probes and accusations, banks are increasingly counting on programs rather than human beings to carry out Forex trades.

The shift to algorithms is most obvious for trades based on the so-called “fix” rate.

watcharakunAccording to the head of trading of a leading currency trading bank, quoted by the WSJ, algorithms are now used to carry out about 90% of orders placed at the daily fix rate, compared with about 5% before the 4pm FX fix investigation.

In addition, there has been a change in how banks process fix orders. Now, banks are increasingly acting as intermediaries by feeding client orders to trading platforms, rather than shouldering the risk themselves. Algorithms do the execution and continuously scan the market for the best rate.

In exchange for providing clients with access to their advanced trading software, banks charge a predetermined fee. This means a change in the profit-generating model too. As Jim Cochrane at ITG put it, “Banks are going from trying to make a super big profit, to just providing a service”.

Commenting on the reasons for the rapid increase in algo use for Forex trading, Javier Paz, an analyst at research firm Aite Group, mentions government-mandated oversight. Indeed, regulators have been stringent in imposing additional restrictions on corporate communications in the wake of the probe, including banning the use of instant messengers across multiple institutions.

The future of Forex trading also looks set for algo domination. According to analysis by GreySpark Partners, algorithmic trading will account for approximately a third of total currencies trading in 2016. This is a steep rise, given that the use of algorithms in currency trading was virtually null a decade ago, GreySpark Partners notes. This growth has surpassed that of trading by phone, and trading on non-automated electronic platforms that require human traders to process orders.

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Institutional FX trading mostly algo-based following 4pm fix scandal investigation - WSJ

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