Forex Platforms Limit Predatory HFTs
Electronic Broking Services (EBS), a platform used to trade foreign exchange, has designed a series of changes in its operating mechanisms to discourage predatory practices by high-frequency traders (HFTs).
EBS has developed plans to raise targets on quote-to-buy ratios, widen the price spreads and set new quoting guidelines for Asian markets. The new measures will target malicious practices such as “latency arbitrage”, where models try to track discrepancies existing in the forex market, profiting for example from the milliseconds delay in transfer of data from the New York to the London market. Other types of HFTs can place and delete orders so quickly, manual traders won’t even know they existed. According to traders, it takes a human around 300 milliseconds to place and cancel an order but a HFT model can do it in less than one millisecond.
!m[](/uploads/story/340/thumbs/pic1_inline.png)Gil Mandelzis, EBS’s chief executive since March 2012, said the changes might seem technical but are aimed at discouraging disruptive behaviour, such as arbitrage with prices, and encouraging genuine liquidity. “The issue is a market structure that rewards certain behaviour, that rewards speed. We would like to go to the core of the issue. This is just the start,” he said. Many investment intermediaries, including Goldman Sachs, Getco, Deutsche Bank, Credit Suisse, Citi and BNP Paribas have backed the changes planned by EBS’s management.
Traditional forex traders have been raging against the HFTs for quite some time, claiming that the automated models do not truly add liquidity to the market and only confuse other traders. “It’s frustrating and it’s harder to transact cleanly in the market,” says a forex trader at one big bank. “It’s something that affects you every day but you deal with it.” Some bankers are even calling for tighter regulations, including longer minimum holding times to clamp down on “flash orders” – orders placed for very short periods of time with no intention of buying or selling but rather simply testing the market pricing.
While the equity markets have been overwhelmed by automated models, the forex market has remained more resistant to the changes. About 50 percent of the trades on the forex market are still carried out by human dealers as opposed to machines. HFTs have not penetrated the forex market so deeply because brokers there play a bigger role as intermediaries and settlements and clearings are very different based on the individual market infrastructures.
The ongoing discontent of bankers with the current forex platforms has led to the development of new alternatives. Deutsche Bank launched Autobahn, a foreign exchange platform aimed at combining voice, electronic and third-party trading, allowing clients and sales people to interact while also carrying out online trades.
UBS, Barclays, BNP Paribas, Deutsche Bank and Royal Bank of Canada have all backed the Swiss interdealer broker Tradition in the development of traFXpure – a forex platform that discourages HFT activity and clamps down on “flash orders”. According to Daniel Marcus, managing director of strategy and business development at Tradition, traFXpure was created as a response to a wide market desire for a fair playground on the exchanges. “Trading on this platform should be as neutral as possible for everyone. Participants will compete on a level playing field and not gain an economic advantage simply due to on a technology advantage.” explained Marcus.
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