Over the weekend, coming on the heels of the NY attorney general calling for curbs, 60 Minutes ran a feature story focused on high frequency trading (HFT). It features outspoken Wall Street critic and author Michael Lewis and takes a hard look at what’s going in the US stock markets and the implications for investors. It’s well worth a viewing.
There’s a link here to what’s happening in the forex market as well.
The two biggest inter-bank dealing platform names, ICAP (EBS) and Thomson Reuters have both been implementing measures in recent years to achieve exactly the sort of thing IEX in the video looks to do – slow down the HFT shops. Some of the things being implemented along those lines is setting minimum quote life times (how long a quote must be made tradable by others in the market) to cut down on “flash” orders, randomizing the order in which orders are processed, and widening some spreads and/or implementing minimum price moves (it’s been suggested that the move to decimalization in the stock market was the first step toward HFT dominance there).
Unlike the stock market where HFT is said to represent the vast majority of US trading volume, in forex it has not yet crossed the 50% threshold according to recent estimates. It is interesting that the least regulated global market is the one where the big platforms are being proactive about curbing the influence of HFT. Stock markets have been HFT-friendly in the pursuit of volume, in forex the operators are thinking more in terms of fairness and transparency as a way to gain market share. Considering that trading in stocks is more directly linked to consumer welfare than is the case for exchange rates, one would think things would be the other way around.
Who would have thought the “wild west” currency markets would be the ones where the strongest measures are being made by the participants themselves (rather than regulators) to curb abusive practices? If only they’d been a bit more proactive with that pesky fixing manipulation problem!