COVID-19 Shocks Will Continue to Shape Future FX Market Structure

COVID-19 Shocks Will Continue to Shape Future FX Market Structure
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COVID-19 Shocks Will Continue to Shape Future FX Market Structure – A New Premium on Sell-Side Relationships and Algos

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Q3 2020 hedge fund letters, conferences and more

Tuesday, October 20, 2020 | Stamford, CT USA — Although day-to-day aspects of the foreign exchange (FX) market have largely returned to normal, disruptions caused by the COVID-19 pandemic will have a lasting impact on market structure and functionality.

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COVID-19 Crisis Continues To Rattle The FX Markets

The COVID-19 crisis rattled FX markets, interrupting market participants’ access not only to liquidity, but also to basic workflows that were upended by the sudden shift to working from home.

“The good news is that the market structure was flexible enough to accommodate rapid changes in execution methodologies and other areas, allowing market participants to adapt on the fly,” says Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Ad Hoc Responses to COVID Shock Will Continue to Shape FX Market Structure.

Among the many changes triggered by the crisis, the report highlights two important impacts. The first, a new appreciation for the value of relationships and high-quality sell-side service and support, and second, an increase in the use of algorithms to execute trades and the shopping of orders across liquidity pools through the use of API aggregators.

“On the surface these two developments seem contradictory,” says Ken Monahan. “In reality, both can be true at the same time. The crisis demonstrated that, in extreme volatility, market participants need both relationships they can count on and effective alternative tools for sourcing liquidity and executing trades.”

The Voice on the Phone

Two-thirds of the FX market participants interviewed in a new Greenwich Associates study said relationships became more important during the COVID-19 crisis that caused a sudden plunge in liquidity across the entire the FX ecosystem.

“FX market participants are going to remember for a very long time how they were treated in the crisis—who stood up for them and who did not,” says Ken Monahan. That reliance on the support of human counterparties is illustrated by the fact that—in what is probably the most electrified market on earth—about 1 in 5 FX market participants increased their use of voice trading during the crisis.

It's Simple: Algos Work Well

Nearly a quarter of study participants increased their use of algos during the COVID crisis and an even bigger share say they plan to step up algo usage in the wake of the crisis.

The increased use of algorithms could have a profound impact on how the FX market functions. “This shift creates a new kind of pressure on the venues,” says Ken Monahan. “While they don’t have direct control over the liquidity provision on their platforms, they can reduce fees, change or introduce new protocols and enhance system performance. This is what has happened in the equity world.”

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Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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