Handbook of Exchange Rates

21.1 Introduction

The spot foreign exchange (FX) market continues to evolve at a rapid pace. Hardly, a day goes by without an article hitting the press describing the spectacular growth of market volumes driven by quantitative trading models and the increasing globalization of trade flows. Given the trillions of dollars in volume quoted, traders familiar with the mechanics of other asset classes might assume that the seemingly bottomless liquidity circulating around the globe would negate the requirement to look to execution strategies that have been successfully deployed in the Equity Markets. (Particularly given the compression of spreads throughout the past 5 years) yet, there are significant savings to be made by adopting algorithms for the appropriate type of FX orderflow. For an increasing number of institutions, the combination of transparency, cost savings, and anonymity that an algorithmic provider can offer makes them an important option to have available complimenting traditional risk pricing when managing execution. The growth in volume has arrived alongside significant changes in market microstructure and just as in other asset classes; algorithmic tools are finding their way onto the desktops of traders across the globe.

This chapter steps through the progression we have seen in this field over recent years and some of the execution tools becoming available for traders to help them navigate a continuously transforming marketplace.

Algorithmic trading can mean many ...