Algorithmic trading in the foreign exchange market

In this article, Maria Bergsten and Johannes Forss Sandahl survey algorithmic trading on the foreign exchange market and discuss its advantages and disadvantages. Using interviews with a number of participants in the foreign exchange market as a base, the authors assess that this type of automated trading, where orders are given and executed by computers, is used for trading currency pairs that include the Swedish krona, and to an even larger extent for trading other currency pairs. The purposes of algorithmic trading are to execute orders, set prices, manage risks and make use of opportunities for arbitrage. Some of these functions are fulfilled by the algorithms referred to as high frequency trading. The authors also note that the practice that has developed on the foreign exchange market largely functions well as self-regulation for managing risk that algorithmic trading can give rise to.

 

The article is included in this year's first issue of the Sveriges Riksbank Economic Review, which was published on 21 March.

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