Market Effects of Autodealing
In this text, autodealing means algorithmic trading.
● In periods of low price volatility, the increased number of bids and offers in the market from autodealing participants may enhance market liquidity for all market participants.
● Prices are quoted and canceled far more frequently in the automated environment than they were in the previous environment that permitted only manual dealing.
● Many new participants have entered the foreign exchange market,specifically hedge funds and proprietary traders that have experience accessing markets other than foreign exchange through autodealing interfaces.
● Systematic traders may pursue the strategy of placing bids and offers on one platform, outside of prices that are available on other platforms, to arbitrage liquidity and credit. This type of trading activity may give the illusion of more liquidity in the market than may actually be available at a given point in time.
● Increased price transparency and secondary market access to additional pools of automated liquidity have reduced bid-offer spreads and margins earned by market-making banks from their customer business.
● Latency differences—differences in the reaction times of systems technology—may arise between platforms and bank systems. These differences may provide arbitrage opportunities for some autodealing models.
● Some market participants have expressed concerns about autodealing stratagems that appear designed to artificially influence prices. Such schemes may raise reputational issues for the market and for those who provide access to the market.
via the Forex Exchange Committee report “Autodealing: Market Impact and Best Practice Recommendations”