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Putting the brakes on high frequency trading

Calls from both regulators and the industry to slow down high frequency forex trading have led to some firms offering their own solutions

Calls from both regulators and the industry to slow down high frequency forex trading have led to some firms offering their own solutions

As the frequency of forex trading soars ever faster, calls are being made to place restrictions on such high-levels as a way of levelling the playing field.

High frequency trading (HFT) has been criticised by both regulators and trading platforms for the way in which investors compete using algorithms to gain the slightest of advantages. They tend to favour larger traders with the resources to use such algorithms, therefore preventing individual investors from getting the best value.

To address this problem one leading firm, ICAP-owned EBS, proposed earlier in the year a system whereby trades are batched together before their place in the queue for confirmation is randomised. This way, the company says, smaller traders will get just as good value as those with advanced computer systems supporting them. Two other firms, ParFX and Thomson Reuters, both offer similar batching systems to counteract high frequency traders.

Gil Mandelzis, CEO of forex trading platform EBS, told the FT earlier in the year: “It is a technology arms race to the bottom, and a huge tax on the industry, since people are having to make significant investments in speed without any connection to their trading strategy.

“Speed has little to do with why many participants come to our markets. These are serious players who come to the market to exchange risk; they do not come to race.”

He added: “The first twenty years of algorithmic trading have added great transparency and led to the compression of spreads – all great things. But there is a line beyond which marginal speed and smaller trade sizes add no value and actually harm the markets. AT some point we, the public markets across asset classes, crossed the line. The ‘first in, first out’ model sounds fair and plausible, but in modern public markets it implies ‘winner takes all’.”

Other suggestions put forward by regulators in both Europe and Australia includes resting periods for smaller trades. While some don’t feel HFT is such a bad thing for the industry, others feel that slowing down the market will allow smaller traders better chances of succeeding.

Larry Harris, finance professor at the USC Marshall School of Business and a former chief economist at the SEC, also told the FT: “Wherever you see high-frequency trading, requiring a delay is a sensible thing to do. We are talking about delays of one-thirteenth of the time it takes to bat your eye. It hardly slows down the market at all, but it ensures that a smaller trader has a better chance of getting first in line.”

 

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