Can Trading Algorithms Infect FX, Too?

03/01/2012 3:00 pm EST

Focus: FOREX

Rob Booker

Author, Man Vs. Market: Lessons from Trading on the Road

High-frequency trading platforms pose big concerns for stock traders, but Rob Booker discusses whether forex traders need to be concerned about possible interference in their markets as well.

High-frequency trading (HFT) is always in the news these days, it seems, but mostly for the stock market. Are there HFT programs involved in the forex market, too?

Our guest today is Rob Booker to talk about that. Rob, what kind of concerns do I need to have about HFT in spot forex.

Well I was speaking to a group of traders, and a hand went up in the back and they said, “How worried do I need to be about high-frequency trading?”

It’s a growing concern in the stock market that high-frequency traders or algorithmic trading is interrupting the flow of trading for regular retail investors. That you’ll click on a price that really wasn’t ever available; fake orders will come into the market and be shown at certain levels that don’t really exist; or “dark pools”—that sounds really ominous—there are dark pools, or off-the-book pools of orders that are waiting, and all kinds of shenanigans that are going on.

It doesn’t make stock trading so dangerous you can’t do it, but it’s starting to cause some problems.

The question was does that really exist in the forex world? The answer is, Tim, it really doesn’t right now.

One unique advantage—and I’m not here selling forex trading to anybody—but a unique advantage of forex trading is you’re really trading from a different book of business in the world of forex.

You’re trading with your broker, and sometimes your broker is the other party, which traditionally has looked like it’s a problem, but when you erase the fact that there is no dark pools, high-frequency trading, or fake orders that are out there on the other side of the market, you actually can say to a forex trader, “No, you really don’t have to worry about that.” Right now, it’s not really much of a concern.

A trader said to me recently that the reason they’re concerned about the spot market is because it’s only the retail public that trades spot; it’s not the mutual fund managers, the professional guys on Wall Street, so if they’re not trading it, why should I? What do you think about that?

That’s a great question. My first answer is that I suppose that Deutsche Bank doesn’t have a trading desk for forex, and I don’t suppose that (The Bank of New York) Mellon has a trading desk for forex, or Goldman Sachs.

If you look at the P&L for the major investment banks, and you look at trading revenue and see how it’s divided up, you can see that a major portion of trading revenue, or income from trading for these businesses, comes from the world of forex.

Whoever said that might be accurate from the perspective of there aren’t a significant number of hedge funds that are trading spot as their major product. You could look at Warren Buffett trading forward contracts that are not significantly different than spot in a lot of ways. Or John Taylor at FX Concepts—it’s one of the largest hedge funds in the world, trading $8 billion worth, and what’s he trading; he’s trading currencies.

It’s good enough for some of those players, but it’s not right for everyone, and that’s absolutely true. It’s not a product that has yet become famously popular in the world of hedge funds.

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