Electronic trading suppresses volatility in currency markets

Advancements in electronic and algorithmic trading are dampening volatility in the $7.5 trillion-a-day foreign-exchange market, industry participants said at the TradeTech FX conference in Barcelona this week.

Volatility has fallen to near its lowest level in a year, with recent events like April’s US trade tariff turbulence now seen as short-lived spikes. While traders rely on big swings, a calmer environment can benefit asset managers and companies hedging currency exposure, Bloomberg writes. 

“The ability for volatility to collapse has gone up exponentially,” said Gordon Noonan, head of FX trading at Schroders. “Spreads used to blow out for ages, now we’re back straight within 30 seconds.”

Currencies now move independently of larger swings in stocks and bonds, with measures showing the euro’s intraday moves at less than half the long-run norm. Bloomberg’s Market Impact Monitor indicates a reduced FX response to major economic releases compared with Treasuries.

Jeremy Smart, head of distribution at XTX Markets Ltd., attributed the calm to the rise of pod shops and competing systematic strategies. “It is possible to see a world where non banks look at FX and go: ‘the returns just aren’t really that valuable versus other asset classes’.”

Betting against volatility has become a key strategy, as flash crashes and dramatic swings have become rarer.

“A few years ago, we would have a flash crash every so often. That hasn’t happened,” said Noonan. “The market is now incredibly efficient in how they look at risk and price it.”

Some analysts point to declining and converging interest rates as a factor. “As central banks converge on their policy, obviously that’s gonna be a deflater of FX vol,” said John Rothstein, chief operating officer at Optiver.

Despite concerns that algorithms may create herd-like behavior, firms continue investing heavily in trading technology.

“That’s the journey that we’ve been on as industry over the last 20 years — it used to be super manual,” said Torsten Schoeneborn, co-head of G-10 FX trading at Barclays Plc. “Now when you’re a trader in many ways you are working with a machine that’s doing a lot of trading for you and you are just receiving the signals and fine tuning.”

By Sabina Mammadli