Algos 'point inwards' amid low liquidity

Tim Cartledge, head of foreign exchange trading at Barclays Capital in London, explained that, because market-making has become a loss-making activity, hedge funds feature less in the market. "The thinning liquidity means we've seen a shift to where it is good to be doing most of your hedging internally and most of our algorithms are now pointing inwards," said Cartledge.

This analysis was echoed by Jeremy Smart, global head of e-FX sales at Morgan Stanley. "We're working on our ability to shift approach quickly and flexibly, and to be able to run that approach algorithmically," he said.

The panel also widely agreed there would be no democratisation of algorithmic trading, as current market conditions make the cost prohibitive to smaller players.

"Unless you're already there, it is a difficult time to jump in," commented Stacy Williams, director of quantitative strategy risk advisory for global markets at HSBC. Williams added there are already signs there will be a core group of banks that have bi-lateral arrangements with dominant regional banks to use algorithms to access liquidity in a regional currency.

Smart thinks the trend for the next few years will be for greater technological domination by the largest institutions. "These dislocations mean banks revert to type and do what they do best. Niche players will do corporate revenues, while big banks will invest in technology and get further ahead and, de facto, control the market going forward."

He predicts a period of consolidation where, in 18 months' time, there will be fewer people in the forex market. He said: "Whenever you get market dislocations like this you see a period of consolidation afterwards and I think that will happen this time round too."

Marco Pelizzoli, co-head of global foreign exchange electronic solutions at Bank of America agreed, commenting "there will be fewer organisations".