Volatility in the $7.5 trillion-a-day foreign exchange market is fading, and industry insiders say the rise of electronic trading and algorithmic strategies may be the reason prolonged wild swings are becoming a relic of the past.
At the TradeTech FX conference in Barcelona this week, traders and market makers highlighted how automation is reshaping currency markets, muting once-dramatic moves that many relied upon for profits. While calmer conditions benefit asset managers and corporations seeking stability for hedging, some participants warned that shrinking trading opportunities could drive liquidity providers away.
“The ability for volatility to collapse has gone up exponentially,” said Gordon Noonan, head of FX trading at Schroders. He cited U.S. non-farm payroll releases as an example, noting that while spreads once widened for extended periods, “now we’re back straight within 30 seconds.”
The trend comes as currency markets appear increasingly detached from the turbulence in equities and bonds, despite ongoing geopolitical and economic uncertainties. Measures of euro intraday swings are less than half their long-term average, even as U.S. Treasury yields continue to move in line with historical patterns. Bloomberg data also shows foreign exchange reacting less dramatically to major economic releases than other asset classes.
Sporadic spikes still emerge such as during April’s tariff turmoil or around central bank meetings but they fade quickly. Market participants attribute this to the growing dominance of algorithmic players and systematic trading firms.
“A lot of that is down to the rise of pod shops and so many competing systematic strategies,” said Jeremy Smart, head of distribution at XTX Markets Ltd. “It is possible to see a world where non-banks look at FX and go: ‘the returns just aren’t really that valuable versus other asset classes.’”
As volatility subsides, betting against it has become a dominant strategy. In the past, fund managers often bought cheap hedges in anticipation of sudden disruptions, but such flare-ups have grown rarer. “A few years ago, we would have a flash crash every so often. That hasn’t happened,” said Noonan, who suggested that highly specialized FX traders may soon be redundant. “The market is now incredibly efficient in how they look at risk and price it.”
Not everyone is convinced the calm makes sense. Some conference attendees noted the paradox between declining volatility and an unsettled macroeconomic backdrop. Others pointed to converging interest rate policies across major economies as a more rational explanation.
“As central banks converge on their policy, obviously that’s gonna be a deflater of FX vol,” said John Rothstein, chief operating officer at Optiver. “It is expected, unfortunately. It’s just maybe strange that it looks different than some of the other asset classes.”
Behind the unease lies another concern: the possibility that widespread adoption of similar trading technologies could create herd-like behavior. If algorithms cluster around identical models, market diversity could shrink further.
Still, investment in technology shows no signs of slowing. A recent London Stock Exchange Group survey found that FX firms are prioritizing machine-driven trading systems over new human hires to gain an edge in the increasingly automated landscape.
“That’s the journey that we’ve been on as an industry over the last 20 years it used to be super manual,” said Torsten Schoeneborn, co-head of G-10 FX trading at Barclays Plc. “Now when you’re a trader, in many ways you are working with a machine that’s doing a lot of trading for you, and you are just receiving the signals and fine tuning.”
For now, the world’s biggest market may have entered a new era of calm but whether that proves sustainable, or simply the prelude to another storm, remains an open question.