Trading News

The Rise of the Machines

I recently came across the blog post Million-Dollar Traders Keep Getting Replaced By Machines and immediately got concerned. As the title suggests, it talks about how human traders are being replaced by algos doing their jobs.

Now don’t get me wrong. I’m all for increased efficiency and cost savings and all that, but some caution needs to be taken here. It’s one thing to have market making type systems that run automatically, and that sort of mechanism has swept through the financial markets (though as Broken Markets indicates, there’s some dubious stuff going on in that arena). It’s another to have an automated system making strategic risk decisions.

Yes, such systems can do very well – at least for a while. The problem comes when they hit markets for which they were not well specified. As just about any trading systems developer will tell you, most automated systems have a limited useful life. One needs to constantly be developing and redeveloping to stay on top of the markets (which begs the question of cost efficiency in cutting trader jobs).

Perhaps more importantly, though, automated systems have a habit of really getting hammered when the markets get hairy. We saw it happen during the financial crisis. We saw it happen during the Crash of 1987. No doubt there have been numerous other situations. It’s impossible to program a system to account for anything that could possibly happen, which means there needs to be human oversight somewhere to make sure the whole thing doesn’t go completely off the rails when things go wrong (which they inevitably will, as I noted in my What the Crash of 1987 Taught Me post.

This goes as much for individual traders as for institutions.

Hmmm…Maybe automated trading systems is how the machines will take over.

Trading News

Battling HFT in the forex markets

I just had something come across my desk that is really interesting and ties in with the stuff in the book Broken Markets which I posted a review for the other day. One of the issues brought up by the authors of that book is the impact of decimalization on the stock market since its introduction and how we’re now seeing sub-decimalization being used by high frequency trading (HFT) systems to scalp. One of the big inter-bank dealing platforms is being pressured by its customers to fight back against a similar thing happening in forex.

EBS is also looking at addressing so-called quote stuffing, which involves putting in orders and pulling them out quickly in an effort to sense market liquidity, etc.

The pippette change is something which could have an impact on pricing in the retail forex market. The quote stuffing thing may as well, but in a less direct fashion most likely.

Here’s the full story from the Dow Jones wire.

UPDATE: EBS To Change Way It Quotes Currencies on Trading System – Sources
06/26/12 09:36
Electronic inter-dealer currencies-trading platform EBS plans to scrap the fifth decimal place on its currency quotes and introduce so-called half-pip pricing ahead of major changes to the system, people familiar with the matter told Dow Jones Newswires Tuesday.

EBS, owned by ICAP PLC (IAP.LN), has been considering a range of options that will change the way investors are allowed to trade on the system in a bid to repair relations with its core banking customer base. EBS shares a dominant position in currency markets with Thomson Reuters (TRI), but it has come under fire from its core bank clients for allowing trading behavior that seemingly favors so-called high-frequency traders in recent years. Now it is seeking to redress that balance.

“We have been engaged in a wide-ranging dialog with key customers and other market participants, reviewing all aspects of the EBS system. This includes a review of the EBS dealing rules. The review is still ongoing and we expect to complete it and share the agreed proposal during the summer,” a spokesman for EBS said in an emailed statement.

In late 2010, EBS added a fifth decimal place to its prices, allowing trades at $1.23456, for example, rather than the old-fashioned $1.2345. That last number will now be available only in increments of five, removing most of the finer price points that work best for high-speed computer-based traders.
The move is designed to increase liquidity at the available price points and takes away some ability for high-speed traders to anticipate where the market will move next, one person familiar with the matter said.

“It’s a massive turnaround,” this person said.

Other changes being considered include so-called fill ratios, which would require a certain percentage of orders sent to the platform to be traded, addressing bank traders’ concerns that many high-speed trade requests are speculative steps to judge where the market might move next, rather than genuine requests to trade. Minimum trading sizes and cancellation times are also under review, according to people familiar with the firm’s plans.
The rethink in strategy comes after the shift to decimal pricing in late 2010 caused relations between EBS and traditional customers to sour. Although most electronic trading platforms currently quote foreign exchange prices up to a fifth decimal place, banks felt the move on EBS favored high-speed funds too much.

Earlier this year EBS announced a raft of senior management changes that saw Gil Mandelzis replacing David Rutter at the helm of the trading system. Since the appointment of Mandelzis, EBS said it would review its trading rules to “eliminate certain types of behaviors” from the system. Mandelzis added that EBS isn’t seeking to become a bank-only platform.

The changes in strategy come after some of the biggest currency-trading banks announced the formation of traFXpure, a rival trading system that is set to launch toward the end of this year. The project was announced after more than 18 months of planning and includes Deutsche Bank (DB), the world’s biggest foreign-exchange trading bank by volume.

Write to Eva Szalay at

(END) Dow Jones Newswires
June 26, 2012 09:36 ET (13:36 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.

Trading News

One broker is so nervous it’s shutting down

The following got mailed out to customers of the forex broker Oanda yesterday:

Due to the extreme volatility some market analysts foresee could result in the coming days, OANDA fxTrade will not accept any trading activity from 6:00 AM EST until approximately 3:00 PM EST, on Sunday, June 17, 2012. OANDA believes the convergence of a major market event during off-market hours represents a potential trading risk and has taken this rare step to protect traders from excessive rate fluctuations.

Please note that during this halt in trading, you can still access your account details but no trading activity will be accepted. For this reason, OANDA strongly recommends that all traders consider minimizing currency exposures prior to the trading halt.

If you do intend to maintain open positions during this period, be aware that OANDA will hold exchange rates steady during the trading halt. However, when trading resumes, rates will immediately adjust to the current market rate and it is possible that the updated rate could result in a margin closeout if the price has moved significantly against your positions. Therefore, it is your responsibility to ensure you have adequate funds in your account to prevent a margin closeout.

Of course this basically just means Oanda will be acting list almost every other broker in not allowing trading on Sunday before the Asia open, but this is a new thing for them. My immediate cynical reaction is that the markets probably won’t end up doing anything much at all. 🙂

It should be noted, though, that this is totally a risk management decision. You can be sure Oanda is going to get as flat as they can heading into the weekend to ensure they don’t take a big hit from a volatility event. Methinks there are a few traders out there who could learn a thing or two here.

Trading News

I have access to forex volume data!

And you don’t! 🙂

We’re working on something in the office whereby we get access to volume data from the folks who run the Reuters forex dealing platforms so we can use it in our market analysis. Right now I can only see the current day’s data to a given point in time (we’re working on expanding that). The chart below shows Tuesday’s distribution actual traded volume by price level for GBP/USD.

Click for full-sized image

By way of comparison, here’s the price time distribution for GBP/USD on the day. You’ll notice the similarity of the two distributions, but also the differences in the upper part of the day’s range.

Trading News

Blog headline complaint

I have to rant. A couple of recent blog post headlines touched on a sore spot with me in terms of misrepresentation of data. Had it been just one, I probably would have let it slide.

Here’s the first one:

Revised Q3 GDP Drops By 20% To 2.0%, Misses Expectations Of 2.5% By 2 Standard Deviations

This is from Zero Hedge. Can you see the issue here?

GDP did not drop by 20%. The growth rate of GDP was revised lower by 20% (to 2.0% from 2.5%). The headline, however, suggests that the Q3 GDP growth rate was -20%, which would be horrific.

Along the same lines, here’s the second headline:

Canada Retail Sales Doubles in September

This one comes from the Oanda blog. Again, it’s a differentiation between nominal and rate of change. Canadian retail sales most definitely did not double in September. They were, in fact, up 1% on the month. This was double the growth rate from August.

If you’ve read Zero Hedge you’ll know they have a tendency toward hyperbolic headlines there, so I can’t say I’m really surprise at the whole 20% thing. Oanda, though, tends to be more straightforward on their blog, so a headline like this was something of a surprise. It just goes to show that lack of attention to detail can trip up just about anyone.

Trading News

Rants in the blogosphere

Michael Kahn at the Quick Takes (Behind the Headlines) blog went on a bit of a rant yesterday which I found rather amusing. Someone on CNBC irked him by suggesting the markets had something wrong. Can’t say I really blame him on that. The market doesn’t hold an opinion. Participants do, of course, but the market is just the place where those opinions are expressed in transactional terms.

Of course I’ve been known to rant from time to time as well, so it’s fun to see someone else do it. 🙂

On a separate note, I’ve just been looking at the stack of trading books I’ve reviewed here over the last few months. There’s seven of them sitting there and all but one is published by the FT Press. Hmmm….

Trading News

Lower leverage for Japanese forex traders

There’s a post on the Forex Magnates site today talking about how Japan has lowered the maximum permissible leverage from 50:1 where it was set somewhat before the CFTC put the same restriction in place to now 25:1. The article suggests the motivation behind the move was at least partly a reaction to volatility in the yen. If that’s really part of the government’s motivation they are likely to be sadly disappointed.

Retail traders, who are more likely to use that kind of leverage, have very little impact on exchange rates. They are driven mainly by the major banks and institutions in the global inter-bank market. This lower leverage won’t have much, if any impact on them. First, they don’t use that kind of leverage, for the most part. Second, they can employ so-called “regulatory arbitrage” and make sure their positions are accounted for outside of Japan’s regulatory purview.