Institutional foreign exchange was historically a voice-brokered market, and high-touch execution remains a significant method of execution. But as electronic trading has expanded to about two-thirds to three-quarters of the market from 20% 15 years ago, buy-side traders have adapted.

The mission is no longer to adapt to electronic trading, rather it’s to wring the most efficiency out of sourcing liquidity off the screen.

“In this new FX landscape the market has a greater reliance on E-offerings, whether it’s from a bank or a third party,” said David Biser, senior trader at Baltimore-based Campbell & Co., which manages about $5 billion. “It’s no surprise these days that market share in the E-space has an outsized impact on total market share as compared to voice trading.”

Transaction cost analysis, well-established in the equity market, is gaining traction in FX, both on a pre- and post-trade basis. “As the buy side grows more sophisticated in its analysis of the fragmented FX market, people are better able to discern where to source liquidity, and they are better at structuring their execution,” Biser told Markets Media.

“Algo offerings are becoming more innovative and specialized, so making sure you have the best product for what you’re trying to achieve is the goal of many execution desks,” Biser continued. “Not continually improving and adapting is a shortfall for some of the banks and algo offerings out there.”

As FX market structure evolves, trading systems and software have advanced. This was the blueprint in the equity market, which was the pioneer in electronification. “There is more of a reliance on technology,” Biser said. “Both technology offerings and regulations are changing in this dynamic industry so it’s important to pay attention to where the banks are going and make sure they’re able to provide what we need on the buy side.”

“In terms of sourcing liquidity, it’s important to make sure that what you’re offering is at least a marginal improvement on what’s already out there,” Biser added. “For the more bespoke offerings like TCA reports, the provider needs to customize to the needs of the client.”

Featured image by William_potter/Dollar Photo Club