Posted by Ben Ernest-Jones
We know that finding real liquidity AND the best pricing for FX market aggregation is something many firms struggle with every day – but that doesn’t need to be the case.
For those wondering how they can defuse their own eCommerce aggravation, check out our new video below. In it, we discuss the value of using flexible, proven aggregation and smart order routing technology to level the playing field.
Interested in learning more? Contact a member of our team to learn about how Progress Apama’s FX Aggregation solution can help your business. We look forward to hearing from you.
Posted by The Progress Guys
Editor’s Note: the following post is written by Theo Hildyard, Solutions Architect, Market Surveillance at Progress Software was origianally published on TABB Forum.
Since the May 6, 2010 flash crash the issue of out-of-control machines trading on global stock markets has made headlines over and over. Just last week a US market maker, Knight Capital, nearly blew itself up with a rogue algorithm. The calls for regulation are growing louder and regulators globally are struggling to bring order to an automated marketplace that is increasingly chaotic.
In India, the Securities and Exchange Board is considering imposing speed limits on high-frequency trading. The Hong Kong Securities and Futures Commission's CEO is very keen to regulate HFT and proposes that algorithms are tested annually. Australia's Securities and Investments Commission (ASIC) wants automated trading systems tested. In Europe the Securities and Markets Authority (ESMA) is preparing to crack down on every aspect of automated trading from algorithms to CDS to short selling. And in the US the Securities and Exchange Commission is tightening rules on automated trading systems and programs, with Knight Capital having added to the urgency.
Machines trade anywhere from 25% (Australia) to 70% (US) of the volume on stock exchanges. The opportunity to make money depends upon the speed of your trading systems along with the intelligence of your algos. Algorithmic innovation is critical in order for high frequency trading firms to find an edge. Research done by the AITE Group suggests that the average lifespan of a trading algorithm can be as short as three months. With such a small window of opportunity trading firms must design, test and deploy new algos on an almost continual basis. No wonder there are problems.
When we allow machines to make the decisions for us, it is imperative that we design them to be fail-proof. Testing in a non-production environment should be mandatory, and back-testing should be exhaustive. Poor quality due diligence and quality assurance is producing catastrophic consequences. It is our responsibility to ensure that our machines, or robots if you will, do no harm.
I am reminded of author Isaac Asimov's first law of robotics: "A robot may not injure a human being or, through inaction, allow a human being to come to harm." The 'harm' in Rule #1 is happening to the marketplace. The flash crash wiped a trillion dollars off of US-listed firms' market capitalization. Knight Capital's rogue algo wiped $440m off its balance sheet and forced it to look for backers in order to survive.
If algorithms and trading systems were programmed with Asimov-style parameters, there would be far fewer glitches. But even if you are the most conscientious firm out there, you cannot ensure that your counterparties have also programmed and tested their systems and algos thoroughly. And it remains your responsibility, to your customers, staff and shareholders, to ensure that those counterparties do not do any harm to your bottom line or reputation.
Catastrophe can only be avoided by adding an extra layer of control in the trading process; a layer which monitors counterparties for rogue algos or fat fingered trades. That way you have both belts and braces - control over internal trading systems and awareness of external ones. Yes, there will be a tiny bit more latency. But isn't a small latency hop better than bankruptcy?
Posted by Richard Bentley
Posted by Ben Ernest-Jones
Foreign exchange trading appears to be moving from a beneath-the-radar, bank-dominated activity into the international trading limelight. There has been an explosion of new trading platforms and a wave of newer participants lately, partly thanks to new transparency afforded by Dodd-Frank and partly because of the relentless hunt for alpha. Increasingly automated, FX is also becoming the next go-to asset class for high frequency and algorithmic trading.
It wasn't always that way. As TABB Group's Larry Tabb said in an article in Wall Street & Technology: "FX has always been different. Be it that currency is a bank’s core product, be it that banks control the payments infrastructure, or be it that banks are critical in implementing Central Banks’ monetary policy, the banks have historically dominated FX."
Because FX is mainly traded via single dealer platforms, multi-dealer platforms such as FXall, and interdealer marketplaces, it is fragmented in a different way from equities. Traditional trading platforms along with a couple of the sturdier newcomers like multi-dealer platforms FXall (which Thomson Reuters is buying) andCurrenex have been the dominant destinations for electronic trading of FX.
But now that the SEC and CFTC have clarified that forex contracts will be determined to be swaps, they will become part of the centrally cleared instrument pool. This means a whole new layer of banks, brokers, and venues are already popping their heads up. FX will soon emulate the expansion, consolidation, and then contraction of destinations experienced by the equities markets.
There will be more opportunities for market participants to trade, hedge, arbitrage and manage risk. Algorithmic strategies will dominate, attracting more and more destination venues - and then fragmentation will be the mantra. So how are traders going to position themselves to scoop the profitable FX bubbles out? It is not as easy as you would think. In many cases, what appears to be an increase in liquidity is actually an increase in “phantom” orders, as institutions advertise the same underlying liquidity across an increasing number of locations. Trading algorithms will need to be smarter, and tuned over time to counteract this as the landscape changes.
Bank traders are looking for ways to handle the new world order of FX. Because their clients want to be able to trade forwards, swaps, spot and even options on the same system, banks are having to do the once-unthinkable: merge their forwards desks with their spot desks.
In the old days of voice trading, forwards and spot traders ran completely separate books and dealt with (mostly) different customers. Today clients are asking to hedge forwards and spot on the same system at the same time. Some want to trade using forward-to-spot conversions against aggregated spot prices from several platforms and some want to use aggregated forward rates directly. Some want a blending of both. The opportunities for banks are plentiful, if they can harmonize FX products, trading and hedging across trading systems successfully.
Many bank clients have seen what has happened in the equities markets; with high frequency trading and algorithmic strategies becoming problematic and largely vilified. When the world’s largest interdealer brokersaid recently that it would tackle “disruptive” practices by high-frequency traders on its foreign exchange platform it became clear that some of the lesser-loved equities issues were already creeping into FX markets.
The Wall Street Journal says that there are already fears of an FX "boom" reminiscent of the equities venue explosion in 2001. "Some market insiders fear the trend for highly specialized new systems aimed at separate pockets of clients could end up splitting the liquidity that underpins this $4 trillion-a-day market, making it harder to trade," said the paper. Pigeon-holing traders, whether it be by class of trader, asset class or by delivery date, only creates more fragmentation. This could equate to lower volumes (like equities), more volatility (like equities) and an increase in manipulative practices (like equities). Regulators will no doubt be watching, and new rules will be implemented even faster than has happened in equities.
In a discussion at the FX Week USA event in NYC recently one FX trading platform provider said that you need a full market ecology to provide proper efficiency. This means having all market participants operate in the same liquidity pool. In the end the unique self-regulating properties of the FX markets mean that the market will shift towards what is best for the market - because it can. Preparation for this inevitability will determine who survives.
Posted by Richard Bentley
Exactly how can you enforce rules when there’s nobody in charge? This was a question that reared its head at the recent International Derivatives Expo (IDX) in London after a statement from David Lawton, Acting Director of Markets at the Financial Services Authority (FSA), who concluded his keynote address by imploring industry to ‘step up’ and take responsibility.
The clear inference from Mr. Lawton’s speech was that it’s the role of regulatory bodies such as the FSA to provide, in some cases, very detailed guidance, but the responsibility of those within the industry to implement it. To my mind this raises a number of questions – not least around how this should happen and, perhaps more importantly, whether or not these guidelines are actually enforceable without a regulatory body policing market activity?
If the onus is indeed placed on the industry to self-regulate, the first barrier that will need clearing is for all market participants to agree that it’s in their best interests to ensure the regulations are adhered to. Only then can we focus our attention on how guidelines such as those announced by The European Securities and Markets Authority (ESMA) regarding the systems and controls required in automated trading environments are followed.
That some form of self-regulation and enforcement is required is however not in doubt. Would you drive a car without brakes and then blame the traffic cops for not slowing you down when the inevitable crash occurs? Participants need to take responsibility for policing their own activities, by deploying the same kinds of real-time controls and surveillance capabilities as venues and the regulators themselves. Brokers and banks often have more visibility of their clients’ trading activities and positions than any one venue or indeed national regulator. (The recently announced plans for a Consolidated Audit Trail in the US will do nothing to change this, given the identity of the beneficiary end-point of each trade is not identifiable from the CAT.)
Increased use of pre- and post-trade surveillance tools will not only help the industry to, as Mr. Lawton suggests, ‘step up’, but could also restore some of the faith in the markets that has been lost in recent months and years. In the absence of any single authority capable of enforcing the rules, it is in the industry’s best interests that market participants fill the gap.