Hedge Funds Almost Double Currency Algo Trading, Greenwich Says

  • Foreign-exchange liquidity shifts as banks step back
  • Company surveyed more than 1,600 market participants

Hedge funds almost doubled their use of algorithmic trading in the foreign-exchange market last year, according to Greenwich Associates.

Sophisticated investors executed 61 percent of their currency trades via automated computer programs in 2015, up from 33 percent in 2014, the Stamford, Connecticut-based financial-services consulting firm said in a report. That compares with buy-side institutions more broadly, including pension funds and other asset managers, which used algos to handle 33 percent of volumes versus 27 percent a year earlier, according to a Greenwich survey of more than 1,600 foreign-exchange market participants in North America, Latin America, Europe, Asia, Australia and Japan.

"That hedge-fund jump is pretty dramatic -- there’s a lot of demand," said Kevin McPartland, head of research for market structure and technology at Greenwich. "The tools that are being provided, whether it be by the brokerages or third parties, are getting better and better."

Banks and technology companies are racing to develop more sophisticated currency algorithms that automate deals based on factors including price, timing and market liquidity. Algos are gaining traction among buy-side clients because they generate data that can be used to reduce transaction expenses and determine the best counterparties and trading venues.

More Use

"By using these tools, we’re actually reducing the trading cost," said Steven List, head trader at AlphaSimplex Group LLC, an investment management firm in Cambridge, Massachusetts, that uses algorithms to execute about 90 percent of its currency transactions. "Now that more and more people see how effective they are, I think usage is only going to increase."

The Greenwich report highlighted changes in the currency market as banks adapt to stricter regulation by stepping back from market making, while firms including hedge funds and proprietary traders step in and provide more liquidity.

About 5 percent of global foreign-exchange investors surveyed last year had access to non-bank liquidity providers, with whom they traded 20 percent of currency volumes. That’s up from 4 percent of investors who transacted with non-banks for 16 percent of volumes in 2014.

"As the banks start to pull back and the non-bank providers see opportunity here, they’re going to come in more and more," McPartland said.

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