The UK’s foreign exchange market is the backbone of international trade and investing. It is vital to support exports and imports, which in turn give Britain access to resources. Without the ability to trade in different currencies, the UK’s prospects would be limited, and economic growth would suffer.
A recent survey by the Bank for International Settlements – the central bankers’ bank – showed that forex trading has grown in London by 30 per cent in the three years since the Brexit vote. London is the global hub of forex, with 43 per cent market share compared to 17 per cent in the US.
That reputation is in the spotlight this week, as today is the first day of the Sibos conference, which brings together 8,000 people working in financial services from around the world. This year, for the first time in the event’s history, it is being held in London and will act as a conduit for those in foreign exchange to drive innovation in finance.
Algorithmic (automated) forex trading is the fastest-growing part of the forex sector, increasing in adoption by 41 per cent from the first quarter of 2018 to the second quarter of 2019, based on the activity of Refinitiv clients on our FXall trading platform. This type of trading is now popular not just with asset managers but also corporate treasurers.
It is increasingly popular in foreign exchange because computers can analyse and act on vast amounts of data far faster than any human. And as we approach the planned Brexit date of 31 October, such trading will become even more significant as traders seek to capitalise on – or hedge against – a continuation of the wild swings in sterling that we have witnessed over the past three years.
Algorithmic trading strategies also have the ability to monitor the news and respond to political events. Following the Brexit referendum, sterling has generally fallen when a hard Brexit has appeared more likely, and risen when this prospect has seemed to fade. So for instance, since the parliamentary vote to block Boris Johnson’s plan to leave the EU on 31 October, the pound has risen two per cent against the US Dollar, hitting a nine week high.
Volatility in the pound has become so sensitive that even Dominic Raab giving a thumbs up gesture to reporters after a meeting when he was Brexit minister prompted a spike in sterling last November. Trading volumes in sterling have jumped after political votes and events.
The surge in adoption of algorithmic trading shows that it has cemented itself as a key option for the buy-side, alongside more traditional manual methods of buying and selling. While questions have been raised around whether this type of trading contributes to market volatility, many self-imposed trading breaks are now in place to ensure orderly markets. For example, traders can now pause trades mid-flow, giving them more control over execution while they monitor market conditions and amend the algorithm’s trading parameters if needed.
But while electronic trading in forex has more than doubled since 2007, it is still far less prevalent than in cash equities and futures. The market continues to grow, and it is moving towards electronic trading backed by high-quality market data and sophisticated tools for execution workflow, analytics, and reporting.
The UK’s competitive advantage in foreign exchange is an important part of the financial services industry, which accounts for 10 per cent of the UK’s total economic output and employs 2.3m people – two thirds of whom work outside of London.
The sector pays more tax than any other, exports more than any other, and generates a trade surplus almost as large as all other net exporting industries combined. So we should support all efforts to promote London’s role as a systemically important centre for safe and vibrant forex activity.