Bank of International Settlements raise concerns
A different topic today as we await the US elections. Around 15% of daily spot trading are executed by algorithms. In case you are not sure what an algorithms is it is simply an automated trading program that executes a trade in accordance with a pre-defined set of instructions. Over time they have developed from simple rule based mechanisms to more advanced strategies that respond to changing market conditions.
Which currencies are using EA's and what's the average trade size?
Check out this handy chart showing the breakdown of currencies that algo's in the FX market are used for. It is no surprise that around 94% of G7 currencies have clients using EA's for. The average ticket size is there too at 31 million for the G7 block.
What are the consequences of using them?
One impact of their use has been a growing move towards market makers, often the bank, trying to match orders internally without passing them on to external venues. This trend has raised some concerns with the Bank of International Settlements as if too much internal order sorting takes place then the quality of prices reported may be undermined. You could envisage a situation where the reported prices is not reflecting the true price. This could also cause the trading volumes on primary venues to drop. This matters because prices from primary trading venues such as Refinitiv and EBS are used as reference prices for other currency trading platforms and for bilateral trading.
Another impact is the rise of 'flash crashes'. These are sudden violent moves in markets and they appear to be accented by algorithmic trading. See here and here. There are also the flash crashes that have been happening without obvious reasons for them.
So, what other impact could you see from the rise of algos? Is it the ultimate end of discretionary trading (are we all just wasting our time?) Will there be a large market mismatch between market makers and real markets that catches the banks out? What do you think?
