Algorithmic Trading and Fx Market Liquidity

Algorithmic Trading and FX Market Liquidity

Is higher turnover in FX markets proof of greater liquidity or merely an illusion?

BY MICHAEL KING, CFA, AND DAGFINN RIME

lobal foreign exchange (FX) markets passed a

milestone when daily average turnover reached

US$4 trillion in April 2010. This figure, reported

in the Bank for International Settlements (BIS)

Triennial Central Bank Survey of global FX markets,

includes all over-the-counter (OTC) FX turnover in spot

trades, forwards, swaps, and options. To make sense of

this magnitude, consider that for the world’s 35 largest

economies, FX turnover was 47 times exports and imports

combined, 22 times GDP, and 14 times equity trading. As

shown in Figure 1, FX turnover peaked in 2008 and

slumped in 2009 as the financial crisis worsened, but it has

since recovered to a daily average of around US$4.2 trillion.

In a recent article, we examined the forces driving the

growth of FX turnover.1 Our research highlights how electronic

trading has transformed FX markets over the past

decade and fueled the growth of algorithmic (algo) trading.

Increased competition between electronic platforms

(combined with improved trade processing and settlement

systems)