A different topic for us to look at today as we await the outcome of the US elections. Around 15% of daily spot FX trading is executed by algorithms. So, what is an algorithm? It is an automated trading program that places a trade according to a pre-defined set of instructions. These algorithms have developed from very simple rule based mechanisms to more advanced strategies that respond to different market conditions.
So, which are the main currencies are using EA’s?
In a Markets Committee survey where algorithm providers where asked which currencies EA’s were used with and what the size of the ticket was the following answered were given. Look at the results of the survey below. It is no surprise that around 94% of G7 currencies have clients using EA’s. This is for the major currencies like the USD, the EUR and the GBP etc. The average ticket size is around 31 million for this G7 block.
So, what are the consequences of using algorithms?
One hidden impact of their use has been a move towards market makers, often the bank, trying to match orders internally without passing them on to external venues. This trend has now 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 to be aware of is the rise of ‘flash crashes’. These are sudden violent moves in markets and they appear to be accented by algorithmic trading. The most likely time for a flash crash is after the close of the US session and before the open of the Asian session, so this is something to be aware of if you are holding trades over that time.
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Editors’ Picks
AUD/USD pressures as Fed officials hold firm on rate policy
The Australian Dollar is on the defensive against the US Dollar, as Friday’s Asian session commences. On Thursday, the antipodean clocked losses of 0.21% against its counterpart, driven by Fed officials emphasizing they’re in no rush to ease policy. The AUD/USD trades around 0.6419.
EUR/USD extends its downside below 1.0650 on hawkish Fed remarks
The EUR/USD extends its downside around 1.0640 after retreating from weekly peaks of 1.0690 on Friday during the early Asian session. The hawkish comments from Federal Reserve officials provide some support to the US Dollar.
Gold price edges higher on risk-off mood hawkish Fed signals
Gold prices advanced late in the North American session on Thursday, underpinned by heightened geopolitical risks involving Iran and Israel. Federal Reserve officials delivered hawkish messages, triggering a jump in US Treasury yields, which boosted the Greenback.
Runes likely to have massive support after BRC-20 and Ordinals frenzy
With all eyes peeled on the halving, Bitcoin is the center of attention in the market. The pioneer cryptocurrency has had three narratives this year already, starting with the spot BTC exchange-traded funds, the recent all-time high of $73,777, and now the halving.
Billowing clouds of apprehension
Thursday marked the fifth consecutive session of decline for US stocks as optimism regarding multiple interest rate cuts by the Federal Reserve waned. The downturn in sentiment can be attributed to robust economic data releases, prompting traders to adjust their expectations for multiple rate cuts this year.
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