High Frequency Trading Causes Controversy in Forex Markets

High frequency traders are increasingly proliferating in the currencies markets as their activities in the equities markets are coming under scrutiny by regulators. HFT uses lightning-fast computers to execute trades in milliseconds, making profits from extremely small price differences. While a trade might earn a profit of just a few cents, when a large number of these trades are made, the profits can be substantial. High-speed trading is a growth business in the $5.3 trillion currency markets, since conditions there create a lot of tradable opportunities. The forex market enjoys ongoing liquidity throughout the trading day, 24-hour trading is possible and there are fewer gaps in currency prices.

The use of HFT in equities trading recently came under investigation following the publication of Michael Lewis’ Flash Boys. The book alleged that the equities markets are rigged as a few small companies are using high- frequency trading to make a killing and dominate the markets. By jumping in front of investors through high-speed trades, traders are able to grab profits in the tens of billions. US financial regulators are currently looking into whether firms using HFT have an unfair advantage over their competitors by using private information. However, some trading firms have defended the use of HFT methods, saying that high-frequency traders are simply exploiting glitches in the system.

The currency markets themselves have also fallen under scrutiny as investigators are looking into whether traders at some global banks tried to manipulate WM/Reuters rates by influencing benchmarks. These traders allegedly pushed through trades before and during the sixty-second window when the benchmark rates are set, colluding with dealers at other firms to maximize their profits by manipulating the benchmarks.

However, defenders of HFT claim that the trading strategy actually contributes some benefits to the forex markets. Since high-speed trading provides transparency of prices, for instance, brokers can no longer provide preferential pricing to favored clients. The Futures Industry Association Principal Traders Group, which includes many of the biggest high-speed trading firms as members, said that HFT actually improves market quality which benefits all investors. In addition, since high-speed trading can reduce spreads, defenders say it actually cuts the cost of trading, increasing the profits of currency traders.

Meanwhile, other currency brokers are fighting back by using a trading platform called ParFX that was created to combat disruptive behaviour and create an environment where intelligence, rather than speed, was rewarded. The platform, which was developed in conjunction with 14 of the world’s largest global banks, subjects trades to a randomised pause ranging from 20 to 80 milliseconds. The fight against HFT is fueled by declining profits in the currency markets. Forex trading revenue at US commercial banks amounted to $1.53 billion in the last quarter of 2013, compared with an average of $1.7 billion over the past couple of years, according to data from the Comptroller of the Currency.

Contribution by MTrading Forex broker from Egypt