Are Investors Really Getting Value For Money When It Comes To Forex Trading?

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The topic of accessing value for money in the world of FX has been a difficult one for different participants to address. Never before has so much technology been prevalent in the industry, but the volume of participants losing out on trading remains exceptionally high. 

Research suggests that 70% to 80% of newcomers to the world of forex lose money, and generally speaking, 80% of all-day traders tend to quit within two years of getting started. 

This sense of disillusionment appears to permeate the entire trading ecosystem, and institutions have been found to be equally as frustrated with the industry. 

According to a recent survey, 82% of European fund managers have experienced a lack of transparency in the forex market, while 73% of their United Kingdom counterparts also reported challenges in transparency. 

These results correlate strongly to difficulties in comparing market quotes and an international rise in FX hedging costs. Perhaps most tellingly, these hedging costs have impacted 84% of European, 75% of UK, and 71% of North American fund managers. These figures offer a strong correlation between the aforementioned transparency issues and the battle to achieve fair value for money. 

So are institutions failing to achieve fair value for money in forex? Let’s take a deeper look at the complex opportunities and limitations that exist in the world’s most vibrant financial market: 

The Quest for Transparency

Transparency is a fundamental requirement when it comes to institutional forex trading. This can help to facilitate access to competitive pricing and operational efficiency as a much-needed standard requirement. 

At present, parties rarely have easy access to the best execution of trades. This requires access to multi-bank best execution and sufficient pricing power to cut down on execution costs. Crucially, there’s often very little clarity on what associated costs actually look like. 

This lack of transparency boils down to the true costs associated with trading for institutions. While market makers can utilize commission, transaction, or margin fees, the industry can become opaque when it comes to routing orders across FX markets. 

The emergence of payment for order flow (PFOF) throughout the retail investing landscape has helped to shed some light on how convoluted markets can be for traders of all scales. It’s for this reason that factors like trust and efficiency have become major issues for institutions to overcome when operating in FX markets. 

This calls for stronger levels of research when it comes to working alongside a prime broker that features stronger alignment surrounding trade execution workflows. 

In utilizing institutionally focused services that offer a suite of intuitive TCA and market impact tools, institutions can hold more power in identifying the most cost-effective market-makers for FX trading in a far clearer way. 

Are Expert Advisors a Sustainable Solution? 

New technologies can help the FX ecosystem to evolve at a rapid pace, and the impact of robot advisors, otherwise known as Expert Advisors (EAs), have been lauded as a breakthrough for trade automation. 

These EAs operate as programs that automate trading processes through data analytics and insights gathered through popular trading platforms like MetaTrader. These automated trading tools typically come at a price and are available to use via a downloadable plugin to MetaTrader. 

However, for institutional traders, the performance of many of these EAs has been a major cause for concern. Automated trading systems are known for demanding a significantly large stop loss to operate, potentially putting significant amounts of liquidity on the line for institutions. 

Furthermore, the parameters set for EAs are often defined in the software itself, meaning that performance can change significantly if market trends change and the software becomes exposed. 

Of course, for institutions, Expert Advisors offer around-the-clock automation that can help to leverage profits on a global scale. But in terms of cost and the rigidity of the software that firms could end up buying into, EAs may only contribute to harming the bottom line of its institutional adopters–particularly if large stop losses combine with a sudden shift in market trends in a way that catches the technology flat-footed. 

This can serve as a cautionary note for institutional investors. The forex market sees significant volumes changing hands on a daily basis. While EAs offer perpetual exposure to these markets, the prevalence of algorithmic trading at an institutional level means that an EA would have to be faster than its like-minded competitors to make positive impactful decisions–and this would likely come at a significant upfront cost to the firm that could prove too costly for the opportunity they provide over the long term. 

Seeking Value Amid FX Opacity

For impact trading success, institutions will need to conduct sufficient research to understand the opportunities available to them beyond the noise and opacity of trading instruments. 

Some prime brokers prioritize the elimination of industry silos to drive more transparency throughout forex markets. In offering a greater quality of insight into market makers and their capabilities, intelligent decisions can be made without incurring needless costs for accessing the best prices at the ideal times. 

While Expert Advisors are also growing in popularity, it’s imperative that institutions are aware of the costly risks associated with this strategy. The prize of around-the-clock trading can be undermined by inefficiencies and the prevalence of competition. 

For institutions to be successful in the lucrative forex landscape, building a sustainable approach that seeks to focus on achieving industry transparency and using it to build efficient strategies, whether they’re automated or semi-automated, is the key to success in forex markets. 

Statistics show that forex traders of all levels face an uphill battle in achieving FX profitability. By making the right moves in developing efficiency strategies, your firm can avoid adding to this unwelcome statistic.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Adam Barron 2 days ago Member's comment

Good read, thanks.