A new breed of trading algorithms has deftly navigated the turbulence in currency markets caused by the coronavirus pandemic, driving up demand ...
LONDON: A new breed of trading algorithms has deftly navigated the turbulence in currency markets caused by the coronavirus pandemic, driving up demand for robots and potentially reshaping the world of foreign-exchange dealing beyond the crisis.
The rise in volumes is partly down to some clients such as fund managers turning to automation during lockdowns because of the difficulties trading from home, the executives said.The growth has eclipsed the broader increase in FX trading volumes - which rose 18per cent in March, according to major settler CLS. Because extreme volatility had persisted over an unusually sustained period in the current crisis, algos have been able to learn and adapt, according to market players.
This sounds like a situation where algos should stay on the sidelines. In fact, policymakers have blamed computer-run trading for worsening spasms of volatility, and linked them to unexplained"flash crashes" because the algos are programmed to stop when prices move significantly, creating vacuums.Executives and investors said one reason was that because the volatility surge, while dramatic, persisted over days and weeks, computers were able to adjust.
Unlike exchange-traded stocks, currencies are traded on dozens of venues, each with its own liquidity. Several venues stopped offering reliable pricing - BNP Paribas turned off six of the 20 platforms it allows clients to transact on.Donner at Goldman Sachs said newer clients, mostly institutional investors, had turned to algos for trading sub-US$500 million of"G10" currencies that could be split across smaller sizes.
In times of higher volatility you would normally expect investors to"opt for the certainty of execution achieved by requesting a quote in the full amount" rather than turning to computers, but that had not been the case, he said.Banks use algos to trade among themselves, and they sell them to clients for fees. Investors have warmed to them because they can lower transaction costs and demonstrate"best execution" prices to regulators. But there are risks too.
Investors also expose themselves to losses should currencies move against them during execution - risks that banks shoulder with traditional transactions.
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