Giles Coghlan LLB, Lth, MA
Financial Source
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
EUR/USD stays defensive below 1.1750 as USD finds its feet
EUR/USD kicks off the new week on a softer note, holding below 1.1750 in European trading on Monday. The pair faces challenges due to a pause in the US Dollar downtrend, with traders shifting their focus to the delayed US Nonfarm Payrolls and CPI data for fresh directives. The ECB policy decision is also eagerly awaited.
GBP/USD holds steady above 1.3350 as traders await key data and BoE
GBP/USD remains on the back foot above 1.3350 in the European session on Monday, though it lacks bearish conviction and holds above the key 200-day SMA support. The US Dollar holds its recovery mode ahead of key data releases, while the Pound Sterling faces headwinds from the expected BoE rate cut this week.
Japanese Yen adds to strong gains and drags USD/JPY to 155.00 amid hawkish BoJ bets
The Japanese Yen extends its steady intraday ascent through the Asian session on Monday, dragging the USD/JPY pair to the 155.00 psychological mark in the last hour. Against the backdrop of the recent shift in rhetoric from Bank of Japan Governor Kazuo Ueda, an improvement in business confidence reaffirms market bets for an imminent rate hike this week.
Editors’ Picks
EUR/USD stays defensive below 1.1750 as USD finds its feet
EUR/USD kicks off the new week on a softer note, holding below 1.1750 in European trading on Monday. The pair faces challenges due to a pause in the US Dollar downtrend, with traders shifting their focus to the delayed US Nonfarm Payrolls and CPI data for fresh directives. The ECB policy decision is also eagerly awaited.
GBP/USD holds steady above 1.3350 as traders await key data and BoE
GBP/USD remains on the back foot above 1.3350 in the European session on Monday, though it lacks bearish conviction and holds above the key 200-day SMA support. The US Dollar holds its recovery mode ahead of key data releases, while the Pound Sterling faces headwinds from the expected BoE rate cut this week.
Gold climbs to seven-week highs on Fed rate cut bets, safe-haven demand
Gold price rises to seven-week highs to near $4,350 during the early European trading hours on Monday. The precious metal extends its upside amid the prospect of interest rate cuts by the US Fed next year. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
Solana consolidates as spot ETF inflows near $1 billion signal institutional dip-buying
Solana price hovers above $131 at the time of writing on Monday, nearing the upper boundary of a falling wedge pattern, awaiting a decisive breakout. On the institutional side, demand for spot Solana Exchange-Traded Funds remained firm, pushing total assets under management to nearly $1 billion since launch.
Big week ends with big doubts
The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.
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