Reuters: US Dollar Report: High-speed FX trading provokes backlash from banks

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High-speed FX trading provokes backlash from banks Jul 18th 2012, 15:27 Wed Jul 18, 2012 11:27am EDT * EBS, Thomson Reuters spot trading volumes fall year-on-year * Manual traders outpaced by high-speed computers algorithms * Some banks considering alternative dealing platforms By Nia Williams LONDON, July 18 (Reuters) - Traders' frustration at being outpaced by high-speed computer algorithms operating on foreign exchange dealing platforms is contributing to a fall in spot volumes on the market's two biggest trading venues and prompting some to look elsewhere. The two primary providers of interbank platforms dealing - Thomson Reuters and EBS, owned by ICAP Plc - both saw year-on-year spot trading volumes decline in June. The drop came even as the average daily value of FX settled topped the $5 trillion mark, according to data from settlement service CLS Bank. Traders said the fall was partly due to other factors including the rise of liquidity aggregators - computer programmes, separate from algorithms, that split orders between a number of platforms to find the best price - and single dealer bank platforms such as Citigroup's Velocity or Deutsche Bank's Autobahn. But many said the perceived technological advantage that "algos", also known as high-frequency traders (HFTs), enjoyed on the platforms was also deterring some traditional bank clients. Thanks to faster connections and superior technological firepower, HFTs can often hit quoted prices before manual traders even if their order is not put in first. "Thomson Reuters and EBS were basically building their business with HFTs, and HFTs were modelling voice traders' behaviour and front-running all the big orders," said one global head of spot trading at a European bank. "It was creating a business but making it more difficult and expensive for manual traders." Other HFT practices include creating a false illusion of liquidity through "quote stuffing", whereby models enter and withdraw large orders within milliseconds, and "statistical arbitrage" in which models profit from discrepancies in the market that change too fast for humans to spot. Analysts from Boston-based consultancy Aite Group said HFTs were more active on EBS than Thomson Reuters but both platforms were popular because they have the deepest liquidity. Many traders said the fifth decimal place quoted in EBS currency prices provided more trading opportunities for HFTs. TECHNOLOGICAL ARMS RACE Traders said smaller platforms such as Currenex, Hotspot and FXall, which Thomson Reuters recently announced plans to buy, could be poised to pick up business from their bigger rivals. There is also appetite for new platforms in the increasingly fragmented FX market to address concerns that speedy computer networks are becoming more important than trading acumen. Interdealer broker Tradition Ltd is launching new platform traFXpure in co-operation with banks including Barclays, BNP Paribas, Deutsche Bank, RBC and UBS. "The majority of participants are happy to compete in the FX market but they are not happy to compete in a technological arms race," said Campbell Adams, managing director of traFXpure. Although HFTs will still be allowed access to traFXpure when it launches later this year, Tradition said there will be no advantage in having faster technology and participants will be able to see who they are trading with. Traders said EBS seemed to be taking notice of what one London-based head of trading described as "the common moan" that manual traders cannot compete with HFTs. Last week, as part of a series of planned enhancements, ICAP announced updated dealing rules containing a new artificial intelligence policy aimed at preventing algorithms from distorting genuine price discovery. EBS is also considering scrapping the fifth decimal place. "It's certainly conceivable we are going to end up changing it, and we are unlikely to added a sixth," said Gil Mandelzis, chief executive officer of EBS. Jas Singh, managing director of Marketplaces at Thomson Reuters, said Thomson Reuters platforms already enforced a minimum price quote life, intended to prevent quote stuffing, and a m ixture of participants were needed to ensure liquidity. He attributed the fall in spot volumes to low volatility in the euro/dollar trading pair and a rise in FX swaps transactions as banks sought short-term dollar funding. SHORT-LIVED FIGHTBACK? Some market players have suggested HFTs and high speed algorithms are facing a backlash. Once touted as the future of trading and expected to dominate FX markets in the same way they dominate equities, they are also being increasingly scrutinised by regulators. But one veteran FX trader said although support for HFTs appeared to be wavering, the future of the market was still tilted in favour of computers as trading desk numbers are trimmed at even the biggest banks. "These things indicate some sort of fightback but I think it will be short-lived," he said. "Young people coming in should be looking at e-commerce. If a box of tricks will be taking the jobs, you want to make sure you are programming that box." Link this Share this Digg this Email Reprints

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