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Tuesday, May 29, 2012

Déjàvu all over again?

Posted by Richard Bentley

Richard.bentleyIt is fair to say that High Frequency Trading (HFT) is a divisive subject at the best of times; for every expert claiming that it benefits markets in the form of liquidity provision, tighter spreads etc, you can always find another who claims that it poses significant dangers and creates a 2-tier market. Whatever the truth, it appears that there are an increasing number who subscribe to the latter point of view, with the aim of excluding HFT from the market altogether.

I wrote previously about recent declines in trading volumes as an indicator that the HFT “backlash” is having effect. HFT is the unpopular kid in the class no-one wants to sit next to. Witness the recent spate of announcements of new venues that explicitly exclude or penalize HFT and its practitioners. In the FX space we’ve heard about

Mako FX’s plan to build what it calls the fastest trading platform in the wholesale FX market, and more recently the launch of a new venue called FXSpotStream backed by 6 major FX banks who will also be the primary liquidity providers. 

Man-thinking

This all gives a real sense of déjà vu, bearing in mind that the EBS FX market was started by a bunch of banks to provide a private inter-bank market, before they let the sharks in and ruined the party. It seems that EBS themselves are now having second thoughts. This highlights something I’ve been saying for some time with regard to HFT; namely, that the market is well equipped to take corrective action if participants care enough, without knee jerk recourse to poorly thought-through regulation. Commercial imperatives will force balancing actions once the pendulum swings too far. This trend is not confined to the FX markets – see CA Chevreux’s launch early this year of Blink, a Dark Pool for European Equities that excludes HFT.

Besides excluding or penalising the HFTs, another "balancing action" I'm seeing is the rapid rise of smart FX execution algos. Our customers have been using traditional VWAP and Percent of Volume style Algos with our Progress Apama FX eCommerce solution for some time, but more recently customers have been telling me how they've had to adapt these algos and build more sophisticated variants, to avoid signalling risk and defeat the HFTs.

This trend to smart algos follows closely what we've seen in the equity and exchange-traded futures markets previously. If it seems like we're re-treading old ground here than that's hardly a surprise - fashions come and go.

But right now it certainly seems that HFT is rapidly running out of friends to play with.

Tune in to our P&L Webinar  “FX Aggregation without the Aggravation” tomorrow to hear more. If you're attending P&L's 2012 Readers’ Choice Digital Markets Awards and Hall of Fame dinner in NYC on Thursday May 31, stop by the Progress Software table to learn more about the Apama FX eCommerce solution. 

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