New FX Platform To Limit HFT Orders

Terry Flanagan

A group of investment banks are backing plans for a new foreign exchange trading platform that is designed to limit the activity of high-frequency traders, as some European investors go in search of venues that nullify the effects of super-fast trading strategies.

Tradition Financial Services, a Swiss inter-dealer broker, will operate the electronic platform, to be called traFXpure, and several of the largest foreign exchange dealers, including Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada and UBS, will ensure firm executable prices in currencies traded on cash-settled, or spot, markets.

High-frequency traders typically operate in markets with high liquidity and FX is the world’s largest and most liquid financial market. The onset of HFT into the forex market in recent years has seen some market participants call for a platform that favors more traditional low frequency and high volume trading.

“Participants will compete on a level playing field and not gain an economic advantage simply due to a technology advantage,” said Daniel Marcus, managing director of strategy and business development at Tradition.

“We’ve responded to a market desire to do this. Trading on this platform should be as neutral as possible for everyone. The support of such a diverse group of global banks gives us great confidence in the success of the platform.”

The new traFXpure platform is in response to concerns raised by major banks regarding the degree of HFT access to the world’s largest interbank spot FX brokerage, the Electronic Broking Services (EBS) forex trading platform, managed by London-based inter-dealer broker Icap. In 2010, HFT accounted for 45% of volumes on EBS compared to just 2% in 2004. EBS faces a dilemma of serving the needs of its traditional core bank clients or accommodating more HFT flow.

“This [traFXpure] initiative is designed to be easily accessible to all market participants with transparency a core benefit of the traFXpure platform,” said Mike Bagguley, head of FX and commodities at Barclays, a British bank.

Tradition has not said when the new trading product will be available.

Proponents of HFT say that it lowers transaction costs and adds much needed liquidity but some venues are looking to better monitor HFT as unnecessarily high levels of order activity reduces the transparency of orders and thus affects confidence in the markets.

In a study last year, the Bank for International Settlements (BIS), an inter-governmental organization of central banks, concluded that although HFT was beneficial for FX markets in normal times, there were question marks as to whether HFT participants would provide sustained liquidity in uncertain times. It also said that HFT could accelerate and propagate shocks initiated elsewhere in the system and questioned whether other market participants, including prime brokers, were “technologically able enough to keep up with their HFT clients or have the financial incentives to do so appropriately” in the FX market, which is currently self-regulated. Trading platforms are meant to follow rules to help foster an orderly and fair trading environment.

HFT techniques have become commonplace in equities markets and it now accounts for a significant share of turnover in some markets, but the forex market had viewed itself as an exception, saying that its market protects itself and traders from algorithmic trading.

However, the rapid spread of HFT has seen currency markets infiltrated by algorithmic trading and, to date, it is most prevalent among the major currency pairs but has the potential to spread to other currencies, according to BIS.

Although the BIS has warned that regulators should not superimpose any regulatory response to HFT directly on to FX markets from equity markets as FX has a different nature, structure and size.

European regulators are looking to crack down on HFT in equity markets, under the MiFID II proposals, with plans to include the installation of meaningful circuit breakers to be put in place, market-making firms that must be required to make continuous prices in the market, penalties for excessive order cancellations and that all orders should be valid for at least 500 milliseconds. Some exchanges, such as Norway’s Oslo Børs and Italy’s Borsa Italiana, are already acting and are set to impose fees on any members that cancel a high proportion of their orders. Institutional investors are also wary of HFT as they find it hard to execute block orders without high-frequency traders moving the market against them.

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