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High-Frequency Traders Descend onto Forex Markets
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High-Frequency Traders Descend onto Forex Markets

  #1 (permalink)
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High-Frequency Traders Descend onto Forex Markets

High-Frequency Traders Descend onto Forex Markets. What are the Implications for Retail Traders? | Forex Blog

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that article is about 6 years behind sched...

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  #3 (permalink)
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sysot1t View Post
that article is about 6 years behind sched...

Yeah ,your correct but I guess they're getting into it heavier now. It might have something to do with the fact that a lot of these guys are backing off the futures and need somewhere else to play in part because of the "frank-dodd" stuff. The signifigance of this is to show the possibilty of forex ending up like the ES....eeeps!

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kbit View Post
Yeah ,your correct but I guess they're getting into it heavier now. It might have something to do with the fact that a lot of these guys are backing off the futures and need somewhere else to play in part because of the "frank-dodd" stuff. The significance of this is to show the possibilty of forex ending up like the ES....eeeps!

doubt FX will end up like ES... #1... trillion dollar market... daily... #2... non-regulated and mostly OTC with super large vol... #3 ... macro economic impact... #4 ... retail only makes about 10-15% of volume via aggregators, institutions/banks make up the rest (in other words, not so easy to day trade profitably and rather capital intensive to profit from it) ... also, major banks wont back off derivatives... they trade trillions daily on OTC Derivatives.. furthermore, D-F focuses on swaps, so not really any reason to exit derivatives trading.. specially when the definition of Swaps(Swap, Security Base Swaps, and Mixed Sways) are being left up to the CFTC and SEC by congress and it can be influence and it is still being worked out.

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From the article:

Here are the facts: “High-frequency trading accounted for roughly 30% of all foreign-exchange flows, as of 2010, compared with 13% in 2004, according to Boston-based consulting firm Aite Group. (By contrast, 66% of global stocks trading is high frequency.” According to Aite Group, it will jump to 42% by the end 2011 and to 60% in 2012. “About 85% of the currency market’s growth in volume from 2007 to 2010 came from financial institutions like hedge funds [represented as other financial institutions in the chart below] rather than Wall Street’s traditional bank currency dealers, thanks partly to high-frequency traders.”

Again I'm not diagreeing with you, I think the gist of it is trading is likely to be a little more difficult because of increased HFT activity. I remember what the markets like the ES were like years ago and with the ramped up HFT activity things became more difficult. Anyway I don't wish to argue this point...How much and to what extent the markets will be affected by increased HFT is debatable. Your guess is as good as mine.

As a last note, I posted it for the benefit of the less omniscient, I apologize if I insulted you.

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kbit View Post
As a last note, I posted it for the benefit of the less omniscient, I apologize if I insulted you.

dood... relax, you have not insulted anyone, and certainly not me... we are merely debating our points of views... therefore there is nothing to apologize for ... I always challenge everything and ask is it true... which goes for my own statements, are they true and if so, how are they true...

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kbit View Post
I remember what the markets like the ES were like years ago and with the ramped up HFT activity things became more difficult. Anyway I don't wish to argue this point...How much and to what extent the markets will be affected by increased HFT is debatable. Your guess is as good as mine.

I never paid much attention to futures, to me they were for hedging and nothing more.. never though of being able to trade them.. now, as someone said to me a few weeks ago, if it has a number and the number moves, it can be traded... e.g. Volatility, Variance, etc.

as to HFT on FX...

the biggest issue with FX is the lack of a central exchange and as such the availability a central order book.. that makes true HFT more difficult... the moment FX becomes centralized and a book is available across the board, then it will be easier for HFT to get busy and drive to a more "efficient" market.

Put it this way, and this is not thinking retail since all retail goes through aggregators... there are about 7 major ECN's that transact about $1T daily (Currenex, LavaFX, HotSpot FXi, eSpeed,FXAll, BLP PowerMatch, EBSPrime).. they all provide full depth of book, but only for what they transact..

The HFT shop today has to aggregate all those feeds and via algo(CEP/Model) determine the action to take as they search for arb opportunities or follow their models... the task is not all that simple, and requires lots and lots of technology and capital to trade properly when the opportunity is found. Dont take me wrong, there are shops out there that do this (aka Macro Funds), but they are not HFT given in its purest form, it cant be done on FX today as it is done in equities.

HFT is all over the news now because of the flash crash on may, and the term is now very missused... no HFT shop (IMO of course) can be efficient when they dont know all the information available to the market place..which is what we have on the FX market...

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article

oh, btw... Timber Hill is basically Interactive Brokers.. and they are another aggregator, they dont own an ECN.. and they are tiny in comparison to the monsters hiding beneath the covers out there...

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Unless the super (do-it-to-the-max) hedge funds all decide to become high frequency sources of bid and ask in "retail" FX, then the impact if any will be negligible at best. If you want to know how the money flows into and out of FX then you will probably want to stay on top of the Triennial BIS Report: http://www.bis.org/publ/otc_hy1011/triensurvstatannex.pdf.

The one thing I noted about the HFT report above, is that it never "defined" HFT from a technical standpoint. Anyone can be HFT, depending on the definition and the truth is retail FX, since the 90's has had what one could call HFTs. What the report did not put into perspective was the relationship to number of trades to notional value. If that analysis had been done, then it would have been clear in the report that: 1) HFT has been in retail FX for quite some time now, and 2) The projected increase for retail FX according to BIS in 2007, would have easily accounted for the influx of these new HFTs.

As you already know, all of FX is OTC. From the Institutional Platforms down to your basic PayPal Bucket Shop FCM, accepting and opening accounts that allow traders to trade with "$1." (I actually ran across a Bucket that advertised this the other day - believe if or not). So, most of the HFT class that the report refers to will have opening balances that will afford them to "trade-up" so-to-speak and onto a either low-end institutional platform (really a high-end FX retail broker), or a straight-up institutional platform using a PM to access a more realistic pool of FX liquidity, that is closer to true Interbank that anything a pure retail FX trader will ever see.

And, that brings up another point. Most (the vast majority) of current retail FX traders who think they are trading "Interbank Rates" because the marketing company disguised as a Retail FX Bucket Shop told them so, have no idea that neither their Bid, nor their Ask, ever sees the light of day in the real Interbank. And, that is because (as you know) all of the FCM/Retail Broker/MM platforms are receiving "dealing rates" through their "dealing desk" (whether they say they have one or not) that come from a proprietary liquidity pool under contract with that FCM or Retail Broker.

Real interbank transactions move in Yards, notional values that are simply beyond the credit reach of the retail FCM crowd. So, they 'make a market' for the smaller retail trader, algorithmically generate their spreads to appear "stable" and promise their proprietary liquidity pool a certain "volume" per day/week/month/year, while on the other hand they promise their customers (retail traders) "guaranteed low spreads and lightening quick STP execution" - which is a totally misleading statement about what's really going on behind the scenes.

This brings up the issue of how the FCM/Retail Broker goes about "off-setting" the trade to their proprietary pool. More like handing-off, than real off-setting, because each one of these guys are basically taking the other side of the trade and acting as counter-party, before any off-set happens - if the truth be told. All the while, the small retail guy thinks that he's really dealing on Interbank. One would need a PM for that, or one would need to become a bank, which is highly unlikely.

However, after saying that - if you look at these proprietary pools under contract with each retail shop, you will note that for the most part they are all eating from basically the same table. Those transactions are just not being centrally housed and there is no central clearing. To demonstrate this, you can go visit the Divisa Capital FX website (a retail FX intermediary) and compare its list of liquidity providers to say, that which you would find on the FXall institutional platform. They share some of the same sources of liquidity, but not under the same contract.

So, I don't expect much impact at all from the influx of HFTs, because I don't expect any of them to go running to their nearest PayPal enabled retail FX broker, which is where they'd have to end up in order to impact the average retail trader. I don't have anything against retail traders, I was one for a very long time and I still have 5% of my funds on a retail platform for other purposes not related to production trading.

I just don't appreciate how the retail side of the business has set out to hurt the smaller traders by using tactics that undermine the success of the retail trader. For the pure retail trader, there are probably only three places they can go to escape most of the Bucket Shop tactics, but I'm almost certain the HFT types the report refers to, won't fit that trader profile and should be able to escape by way of initial starting balance, a I stated earlier.

Nice thread, good question. Cheers!

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The forex market itself is divided and compartmentalised. Which hinders the ability for HFT systems to work properly.

If any country notices that their currency is undergoing heavy volatility I can guarantee you that they will do something about it. FX affects much in the economy of developed nations.

Lastly the total size of the real FX market is so large most HFT trades would just be lost in the huge sea of transactions.

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