Algorithmic trading's new frontier

Here at FX Week we're coming to you with a whole new team. I'm taking the helm and would like to introduce you to James Norris who joins us from Financial News, and Matthew Martin from Finance Week.

In the industry we've found ourselves at the next frontier of algorithmic trading – retail investors. Saxo Bank is preparing to roll out a new algorithmic trading product specifically designed for retail clients. Speaking to some traders in the market, it seems others will likely follow.

And why not? Over recent years, retail investors have been generating a more significant proportion of flows. Research from Greenwich Associates found that FX aggregators or futures brokers that facilitate retail investment in FX made up 10% of FX volumes in 2005. Although 10% does not seem like much, it is up from non-existent levels previously.

The potentially lucrative business opportunity presented by this community of traders saw a number of banks build and push out margin-trading platforms last year. Notably, industry leader Deutsche Bank was quick to develop and launch its product dbFX, which I understand is having some initial success. UBS, meanwhile, teamed up with Dublin-based technology vendor Cognotec to build a multi-asset class retail platform.

Market sources say there is a pipeline of dealers looking to launch margin trading platforms aimed at the retail community. But algorithmic trading tools in the hands of retail investors? Isn't that slightly premature?

I was speaking to one technology vendor last week about the story and asked him what he thought were the implications. His response: "They can lose their money faster." OK, I admit, I laughed too.

Others agreed that, naturally, there is a risk associated with downstreaming these tools for retail investors. Although there haven't been any massive fallouts in FX between retail traders and major dealers, there is a threat that we're asking them to run before they can crawl.

Saxo Bank argues that its tool will actually help retail traders better understand and manage their trading styles. The ability to back-test and optimise a strategy is better than diving right in and trading it online, right?

A head of FX at another bank added that as banks target smaller funds and more sophisticated investors, "we have to offer the right tools for them."

I suppose that's true. And, I suppose, so is the old adage, nothing ventured, nothing gained.