EBS, one of the world’s two main foreign exchange trading platforms, is proposing a technical change that could reduce the advantages of high-frequency traders in the global foreign exchange market by batching incoming orders together and dealing with them in a random order, according to media reports.
The proposal would eliminate so-called ‘first-in, first-out’ trading that gives priority to faster computers and often offers an edge to high-frequency trading (HFT), according to a report in the Financial Times. The newspaper says the proposed change would act as a ‘speed bump’ for high-frequency traders.
‘It is a technology arms race to the bottom, and a huge tax on the industry, as people are having to make significant investments in speed without any connection to their trading strategy,’ Gil Mandelzis, chief executive of EBS, told the FT. ‘Speed has little to do with why many participants come to our markets. These are serious players who come to the market to exchange risk; they do not come to race.’
EBS, owned by interdealer broker ICAP and Thomson Reuters, operates the world’s two most-used trading platforms for the foreign exchange market. A third system launched this month by banks including Barclays and Deutsche Bank, called ParFX, already uses a system that pauses incoming orders to ensure fairness, the FT says.
HFT is increasingly capturing the notice of regulators and various market players, especially since the flash crash of 2010 that sent the Dow Jones Industrial Average briefly plummeting 9 percent. More recently, HFT was also blamed for the series of mistaken trades that inflicted $440 mn of damage in August last year on Knight Capital, one of the main market makers in the US.
Aside from the possible move to scrap the first-in, first-out principle by London-based EBS, the SEC last month proposed a series of regulations designed to minimize the risks of HFT. Regulators in Europe and Australia have also proposed forcing a delay to slow down trading and decrease competition for faster orders.
The SEC’s proposed series of rules, known as Regulation SCI, would oblige exchanges, clearing agencies and alternative trading systems to establish procedures to ensure the ‘capacity, integrity, resilience and security’ of their technology, allow SEC inspections to ensure compliance, notify the SEC whenever systems issues occur and conduct annual reviews of their systems. The SEC would also oblige exchanges to undertake regular business continuity testing and test disaster recovery plans at least once a year, as well as co-ordinate with other entities in the sector.
