General Information

Algorithmic Trading in the Forex Industry

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Most of the growth that happened in algorithmic trading in the forex markets during the past years has been because of algorithms automating specific processes and chopping the hours needed to conduct foreign exchange transactions. The efficiency made by automation resulted in lower costs in carrying out these processes, like the execution of trade orders. Automating the trading processes with an algorithm that trades according to predetermined criteria – like conducting orders over a given period of time or at a specific place – is much more effective compared to manual execution.


In addition to that, banks have also taken advantage of algorithms programmed to update prices of currency pairs on electronic trading platforms. And these algorithms improve the speed at which banks can quote market prices. At the same time, diminishing the number of manual working hours it needs to quote prices.


Also, several banks program algorithms to lessen their risk exposure. They can use the algorithms to sell specific currency to match a customer’s trade bought by their bank in order to keep a constant quantity of that particular currency. As a result, this lest the bank maintains a pre-specified level of risk exposure for holding on to that currency.


Aside from that, these processes have been made to be more efficient by algorithms. And most of the time, it results in lower transaction costs. Nonetheless, these are not the only remaining factors that have been driving the growth in the algorithmic forex trading.


The combination of high frequency and the capacity to immediately interpret data and execute orders has enabled traders to exploit arbitrage opportunities appearing from small price deviations between currency pairs. Because of this, the use of algorithms had massively increased for speculative trading.


Inside the Forex Market


Now, in the forex market, the primary methods of hedging trades are through spot contracts and currency options. Here, spot contracts are the buy or sale of foreign currency with instant delivery.


Moreover, the spot market has grown incredibly from the early 2000s due to the influx of algorithmic platforms. Particularly, the fast proliferation of details, as people can also see n market prices, lets arbitrage opportunities to come out.


Known in the forex market, the triangular arbitrage is the process of converting one currency back into self through multiple different currencies. Furthermore, algorithmic and high-frequency traders’ only way to determine the said opportunities is by means of automated programs.