Algorithmic Trading in FX: Fad or Reality?

By Darren Jer | Sep 2, 2008

Extract from Aite Group’s Report
Algorithmic Trading in FX: Fad or Reality?

FUTURE OF ALGORITHMIC TRADING IN FX?

It is undeniable that electronic trading has increased substantially over the last few years in the FX market. With the increased participation of various proprietary trading desks (both bank-affiliated and independent) and actively trading hedge funds, speed of execution is increasingly becoming a major issue in the FX market, which by definition is global in nature.

This means that there is no centralized location for execution. A trader attempting to trade EUR/USD might be looking to capture market data from multiple locations scattered around the different time zones to ensure optimal trading execution. This is a major issue for actively trading firms. Depending on the distance of the various potential execution venues, a certain amount of latency exists (purely based on difference in distance as well as the existing IT infrastructure of the various execution venues), which can seriously hamper an overall trading strategy in which every millisecond counts. This latency issue is expected to get worse as electronic trading adoption increases, and the FX market continues to attract high-volume, low-frequency trading firms.

One startup, MarketFactory, has recently launched a solution — Whisperer — aimed at resolving this issue. While MarketFactory itself is in the business of creating asset-class-agnostic marketplaces, Whisperer is designed specifically to address the issues associated with the globally distributed reality that exists in the FX market. A MarketFactory client would install the Whisperer software at the various data centers close to the various execution venues, allowing relevant market data to flow back to the client in real-time so optimal trading decisions can be made regardless of the location of the execution venues, thereby largely eliminating the issues associated with distance-based latency.

Full report available from Aite Group at www.AiteGroup.com

Source: Aite Group

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