Equal and fair spot FX trading vital for well-being of overall market
Advent of HFT helped hedge funds gain an unfair advantage in the spot FX market, with banks left to trade at less favourable rates. December 10, 2013 | Mobasher KazmiThe introduction of high frequency trading (HFT) has thus far seen mixed and varied response among market participants, especially within the global foreign exchange (FX) space. The spot FX sub-set in particular has been subject to trading strategies and behaviours that would arguably call into question the integrity of trading platforms. HFTs, already in the spotlight with their highly questionable role in the flash crash of May, 2010, were found culpable of engineering latency arbitrage by timing their order execution so as to pick off the best pricing from genuine market makers. These trading strategies correctly necessitated a rethink by banks, traditionally the main participants of foreign currency markets, who were being squeezed on pricing by hedge funds engaging in ultra-HFT. HFT offers the advantage of speed, technology and market data access, leaving banks to trade at less favourable rates. Faced with the prospect of continued losses on the main FX trading platforms of EBS and Thomson Reuters, twelve founding banks located across key global financial centres approached inter-dealer broker Tradition to establish an alternate electronic exchange venue that would prevent latency arbitrage and enable low-cost trading in the spot market. Initially the primary users of spot FX trading, banks access the spot FX market to service clients’ transaction needs; not generate a return from any mandated investment strategy as certain buy-side institutions employing HFT techniques do. As Roger Rutherford, chief operating officer at ParFX explains, “What has happened in spot FX is that there are different rules for different people. There are infrastructures where predatory trading is hurting institutional investors.” Consequently, banks preoccupied with managing their client requests by placing orders into the marketplace were getting are out-competed on price and orders by hedge funds; leaving them to manage with the outstanding risk remaining on t... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Asset Management, Trustees and Custodians, Markets & Exchanges, Trading & DataTrustees Custodians and Depositories,Markets Exchanges,Trading & Data, Asset Management, Trustees and Custodians,Markets & Exchanges,Trading & Data, Keywords:HFT, Spot FX, Hedge Funds, ParFX, EBS, Thomson Reuters Dealing, Roger Rutherford, Tradition, Gil Mandelzis HFT, Spot FX, Hedge Funds, ParFX, EBS, Thomson Reuters Dealing, Roger Rutherford, Tradition, Gil Mandelzis
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