AI changes the FX game – here’s why the customer wins

The impact of Machine Learning on the FX market is growing by the minute and affects everything from market making, to execution and risk management. We asked Simon Österberg, Chief quantitative trader within FX at SEB, to give us an overview of what is going on and to clarify who the true winners of the AI race are.

“Technology is developing rapidly everywhere, and the FX market is no exception. Those unable to adapt to the shift will, ultimately, struggle to survive”, Österberg says. Below he explains how machine learning and AI are employed within three different areas of the FX field.

1. Market Making
   Market Making is the part of FX operations where a bank provides prices to clients wanting to buy or sell currencies. This means that the bank continuously offers bid and ask quotes for various currency pairs – a task that demands both speed and precision.
   
   "Within market making, we use machine learning to identify trading patterns and market dynamics, which helps us provide more accurate and competitive pricing for our clients."
   
   
2. Execution
   Execution is about making FX transactions in the smartest way possible, by choosing the right market, timing, and strategy to minimize cost and risk. SEB has developed its own execution algos – software that can automatically execute currency trades.
   
   “We interact with the market constantly, and every time we do, we get new information. We’ve stored hundreds of billions of price, order and trade updates, which are fed into our algos. By using machine learning to generate unique trading signals, SEB’s algos can offer clients better and more efficient execution.
   In Scandinavian currencies we have an extra strong position and competitive edge, due to our deep data insights and large market presence.”
   
   
3. Risk management
   Risk management deals with the bank’s ability to handle the exposure that it takes on when clients trade currencies and want to hedge their risk. Machine learning helps banks make smarter decisions about how to manage their own risk exposure.
   
   “It allows us to go beyond human capabilities in analysing historical data, behavioural patterns, and current market conditions – enabling us to better anticipate market reactions. This, in turn, means we can improve our prices, making us a more competitive counterpart for our clients and attracting more flows. It’s a virtuous cycle.”

Why the customer wins

It is safe to say that AI and machine learning are now integral to the FX market. This growing automation is not only transforming how trades are executed – it is also reshaping the very dynamics of the market, according to Österberg.

"AI and algorithmic trading have led to more frequent, smaller trades and a more fragmented market."

But who benefits most from this shift, then?

“Ultimately, the increased efficiency and the fact that AI also makes it easier to measure and compare the performance of banks will benefit the customers through improved services and pricing”, Österberg concludes.