IA brings greater transparency to FX algorithmic trading

Algorithmic trading – the use of computer programmes following a defined set of instructions to trade – has become a well-established feature of the overall marketplace. While initially this method of trading was seen most commonly in equity markets, in recent years foreign exchange traders have increasingly used algorithmic trading strategies to find liquidity, increase productivity and reduce trading costs. Today it is believed that 10-20% of all FX trades are conducted via algorithmic trading strategies, or algo for short.  

Investment managers are among the increasingly common users of FX algos to conduct their trades, as they seek to provide best execution for their clients. However, in seeking to protect the interests of their clients and to meet their regulatory obligations, it is vital that investment managers conduct proper due diligence on the FX algos they receive from their providers to fully understand the features offered and the risk controls in place.  

With this in mind, the Investment Association (IA) has today published an FX Algo Due Diligence Questionnaire, created by its members to establish a common framework for the request of information from clients to their FX algo providers.    

This questionnaire will help guide investment managers – and indeed other market participants – as to the kind of questions they should consider when conducting their FX algo due diligence. Topics covered include venue selection, algorithm features and strategies, analysis, risk controls, and confidentiality.

The IA’s members continue to fully support the push for best execution, with this questionnaire forming part of the wider conversation being had around transparency in FX markets, including as part of the ongoing three-year review of the FX Global Code.