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 Book Reviews

Book Review: Broken Markets

[easyazon-link asin=”0132875241″][/easyazon-link]In the retail foreign exchange market there is a long history of complaints about brokers taking advantage of customers to their own benefit. Having now read [easyazon-link asin=”0132875241″]Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio by Sal Arnuk and Joseph Saluzzi[/easyazon-link], I can’t help but think things in the equity market are so much worse. At least in the forex market the types of front-running and conflict of interest activities the book talks about tends to draw the attention and ire of the regulators. In the US stock market, though, this stuff and worse is going on at the hands of high frequency trading (HFT) systems, and it’s largely thanks to regulatory changes that have been made over the last number of years. Not only that, but nothing has really been done to prevent another Flash Crash from happening. At least that’s the takeaway I get from reading this book. It’s an eye-opener.

We’re not just talking about front-running, which was a complaint often aimed at the old specialist system. We’re talking about what information is being provided to which market participants and not to others. We’re talking about the way orders are being routed and how brokers are being paid to send orders to specific exchanges and/or dark pools. It’s no wonder so many individual investors think it’s a rigged game!

Now, as much as there’s a lot of really interesting (and potentially horrifying) information and ideas in the book, it is a text with a clear agenda. The authors are advocates for change – in some cases a reversion back to prior market structures. They make good arguments (and there are copious footnotes), to be sure, but as someone who doesn’t have a deep knowledge of the mechanics and inner workings of today’s equity market, I would personally need to hear from the other side of the debate before forming my own position on specific proposals. That said, the case I have heard made in the media in support of HFT in terms of added liquidity, etc. thus far is not sufficient to overcome the objections presented by the authors of Broken Markets.

As much as this book is a good argument for a change to the system and the need to rein in HFT, however, it gets marks off for how it was written and structured. There is a lot of repetition of ideas and arguments. It has the feel of a book comprised of a collection of articles rather than being something purposefully written. The inclusion of a couple of guest chapters furthers that impression. While I haven’t (yet) read the white papers written by the authors (they are included as an appendix), I get the distinct impression most of the book comes right out of them. As a result, I can’t help but wonder if it wouldn’t be better to just read them and not bother with the book. The white papers can be found on the web, and the authors blog regularly on the HFT subject.

So the bottom line is that [easyazon-link asin=”0132875241″]Broken Markets[/easyazon-link] has a lot of important information and ideas, but isn’t the greatest book because of how that stuff is presented, so I give it a middling rating overall.

Make sure to check out all my trading book reviews.