ELECTRONIC trading is not a new development. Nasdaq, the first electronic exchange, is more than 40 years old. But advancing technology has slashed latency. On the NYSE, 10 years ago an order took 20 seconds to execute a trade, now it takes one.
“High-frequency trading (HFT) is a natural result of the technological developments we have seen over the last few decades,” says Pierre Lequeux, head of currency management at Aviva Investors. “In the 80s most of the FX inter-bank trading was conducted over the phone, today there are also other electronic platforms available made possible due to the tremendous increase in the number crunching power of computers.”
In the equity markets, in 2005 HFT represented less than 20 per cent of US equity market turnover. Today this has more than tripled. And HFT is taking a grip on foreign exchange markets too: “It doesn’t matter if you’re dealing with forex or trading toasters on Mars,” points out Tim Bevan, director of global electronic trading services at Otkritie Capital, “high-frequency traders are interested in liquidity. Forex obviously fits the bill as the most liquid market in the world, but traders are simply looking for anywhere where they can eke out a latency advantage.” This high-speed arms race is creating dramatic changes in the forex landscape, as institutional traders vie for a market share. According to Pierre-Francois Filet, chairman and co-founder of QuantHouse: “Firms that have invested in high frequency trading infrastructure will certainly have a competitive advantage.” But he adds “other trading technology providers are also adapting their solutions for the FX market, meaning traders will soon be able to enter the HFT world within the next few months.”
With this shifting landscape, John Juer, Commerzbank head of FX financial engineering, underlines the importance of the right platform: “It is important for institutions to have trusted trading partners who provide true and reliable liquidity rather than looking for short term liquidity.” And in a world where nanoseconds matter, not all platforms are equally suited to HFT strategies. According to Toby Corballis, chief executive of Rapid Addition, those who have invested in technology, taking into account future costs of strategy updates and improvements in technology, are reaping rewards over those who have neglected investment in this area. According to Corballis: “The winners here are those who not only think about hardware, but who take the time to invest in software to give them the deterministic latency on which they can reliably model their strategies.”
Despite HFT’s detractors, who lay the blame for recent flash crashes at its door, the race for ever lower latency is only going to hot up. Institutions should be wary not to be left behind.