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Gaining a foothold in FX

Published in Automated Trader Magazine Issue 28 Q1 2013

Adam Cox reports on the continuing appeal of the massive foreign exchange market for funds, brokers and vendors alike.

Gaining a foothold in FX

Ever get the feeling that every time you turn around, a new FX trading platform is springing up? Philippe Bonnefoy sure does.

"I went to an FX dinner in Zurich where every single person in the room seemed to have an FX brokerage," said Bonnefoy, who is chairman and chief investment officer of Newscape Capital Group.

Philippe Bonnefoy

Philippe Bonnefoy

"I went to an FX dinner in Zurich where every single person in the room seemed to have an FX brokerage."

"I think one of the reasons is it's not particularly expensive to set one up. It's pretty easy to do and you back-end it into one of the banks and there are now almost whole packages you can buy to do that," he said.

In the wake of a slackening of trading volumes in equities, forex has been very much the go-to market for algorithmic traders. Anecdotal evidence and surveys (including the latest from Automated Trader) show that the trend to move into FX has shown little sign of abating. This seems to be true of the buy side, the sell side and vendors who are developing products and services for the market.

But a central question remains: is there really enough appetite for all these new platforms? Are there enough flows to make them profitable? On that, the market is sceptical. Many predict that a number of the new trading venues will shut down over the course of the next year or so.

But for now, many on the buy side and sell side - as well as the vendors - are still piling into the FX arena.

For one thing, size matters.

"We really like the FX space - because $5.2 trillion a day trades in it. It's the largest market in the world," Bonnefoy said, estimating that it was some 25 times the size of the average daily traded value of the US equity market.

What is more, he said, few funds seemed to specialise in FX.

"The idea is to take some of our quantitative models we've spent years developing and apply them in a bit more of an intuitive way to other parts of the FX markets and other parts of the interest rate curve," he said.

Thomas Pasturel, head of research and development at Pecora Capital, also noted it was rare to find FX-only funds, at least in the area where his fund operates.

"There are very few alternative asset managers out there who focus primarily on spot FX," he said.

Pasturel's managing director, Aaron Smith, said he saw potential for enormous growth in terms of asset management trading of FX, akin to the growth he saw in managed futures since about a decade ago.

"Dedicated FX-only hedge funds only account for about $50 billion, which is an incredibly small proportion of the overall hedge fund universe," Smith said. "The possibility for growth there is quite high, just simply because we bring liquidity, efficiency."

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