StreamBase FX Study Reveals Increased Buy Side Use of FX Algos

NEW YORK -- 12/18/12
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Speed is still a key factor to secure better prices and achieve best execution

StreamBase Systems today announces the results of its fourth annual “FX Trading and Technology” study of more than 240 institutional FX traders. The survey reveals increased usage of FX algorithms among buy-side participants, from 34% in 2011 to 48% in 2012. Only 25% of buy side participants are not involved in algorithmic trading and have no plans to do so in the future. The use of multi-bank trading platforms increased by 17% and single bank platforms by 7%.

Speed is still a key factor to achieve best execution among all survey participants. The ability to access low latency sources for algorithmic trading ranks as the biggest challenge for FX market data management, followed by the difficulties of integrating different feed formats from multiple liquidity providers. However the survey also reveals that establishing and maintaining strong relationships were frequently mentioned when participants were asked how best to secure better prices.

“The FX industry is forced to maximize profitability within narrower margins as a result of low volume and volatility,” said Sang Lee, co-founder and Managing Partner at Aite Group. “The increased adoption of multi-bank trading platforms and algorithms indicate buy-side firms’ demand for control and transparency. The ability to provide value-added services, including customized algorithms, real-time liquidity and risk analytics will help sell-side firms to stay competitive.”

“I think we will see firms be more agile and efficient by leveraging technology to allocate resources and creating value for customers,” said Richard Tibbetts, CTO at StreamBase Systems. “The challenge is to make the architecture flexible and scalable enough to manage multiple liquidity providers, develop and deploy algorithms and risk metrics according to changing market conditions.”

Key takeaways from the survey include the following:

Algorithmic Trading

  • Use of execution algorithms is up 6% across all respondents
  • 48% of buy-side firms use algorithms to execute their FX trades, a 14% increase from 2011
  • Liquidity aggregation algorithms followed by floating algorithms are the two most commonly cited algorithms in use by FX firms
  • There is more variation and creativity in buy-side algorithms than on the sell side

Pricing

  • The usage of multi-bank platforms and single bank platforms increased 17% and 7% YOY, respectively
  • Participants are slightly more satisfied with single bank platforms than multi-bank platforms. 14% are not satisfied with the prices they receive from multi-bank platforms.
  • The industry still lacks benchmarks to compare prices
  • Nearly half of the sell side is looking to improve their pricing and rates engine capabilities

Risk

  • Both buy-side and sell-side participants are least satisfied with their “auto hedging and risk management capability”
  • About 54% of sell-side firms plan to improve or add real-time liquidity management capabilities to optimize liquidity for customers and to manage risk more efficiently

Exotics and Growth

  • No significant change in how the buy or sell side trade exotic pairs, yet the sell side listed the growth of emerging markets as having the second largest impact on their FX business

Over 240 institutional FX traders actively trading FX participated in this study over a 2-month period in 2012. Results from the survey were recently discussed in an online roundtable by a panel of FX industry experts including Sang Lee, co-founder and Managing Partner, Aite Group; Ugur Arslan, CEO of AienTech, a multi asset, multi strategy hedge fund; Richard Tibbetts, Co-Founder and Chief Technology Officer of StreamBase and two senior executives from top sell-side banks.

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