Does FX Face The Same HFT Vulnerabilities As Stock Markets?
- The fragmented nature of the global FX market to an extent insulates the industry from having prices manipulated by buy-side HFT systems.
The fragmented nature of the global FX market (which is a frequent source of challenges and frustration for tech providers, LPs and regulators) to an extent insulates the industry from having prices manipulated by buy-side HFT systems. Due to the fact that equities exchanges trade at one centralized point, the tactics used by HFT systems to manipulate pricing can be focused on the single venue where all parties transact. In FX, this is a bit different, as there are many different Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term pools, some custom to a specific broker, geography or even type of client. This makes it much more difficult to "rig" the system as in many cases you are trading on a stream custom tailored to your type of flow.
In an exchange model, for any algorithmic participant, both the "seed" feed and feed they are pricing into is the same. With FX, even the providers who are pricing into an exchange are generating their feeds off of inputs from multiple other liquidity pools. This allows for a natural set of checks and balances that prevent any single provider from moving the overall market. It certainly is possible that an HFT system could target and manipulate a single pool, but it would be quite difficult to do this against the market as a whole.
One area where price manipulation can rear its ugly head is in less liquid currencies, where the number of available Liquidity Providers Liquidity Providers A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi Read this Term and pools is smaller. This is, generally speaking, less due to an increased vulnerability to technically sophisticated price rigging or jittering and more just due to a lack of participants.
Electronic FX trading has had the benefit of maturing on the heels of online / algorithmic stock trading and I am confident that the banks and LPs behind FX pricing are watching and learning from the examples shown in the HFT equities space.
The fragmented nature of the global FX market (which is a frequent source of challenges and frustration for tech providers, LPs and regulators) to an extent insulates the industry from having prices manipulated by buy-side HFT systems. Due to the fact that equities exchanges trade at one centralized point, the tactics used by HFT systems to manipulate pricing can be focused on the single venue where all parties transact. In FX, this is a bit different, as there are many different Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term pools, some custom to a specific broker, geography or even type of client. This makes it much more difficult to "rig" the system as in many cases you are trading on a stream custom tailored to your type of flow.
In an exchange model, for any algorithmic participant, both the "seed" feed and feed they are pricing into is the same. With FX, even the providers who are pricing into an exchange are generating their feeds off of inputs from multiple other liquidity pools. This allows for a natural set of checks and balances that prevent any single provider from moving the overall market. It certainly is possible that an HFT system could target and manipulate a single pool, but it would be quite difficult to do this against the market as a whole.
One area where price manipulation can rear its ugly head is in less liquid currencies, where the number of available Liquidity Providers Liquidity Providers A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi Read this Term and pools is smaller. This is, generally speaking, less due to an increased vulnerability to technically sophisticated price rigging or jittering and more just due to a lack of participants.
Electronic FX trading has had the benefit of maturing on the heels of online / algorithmic stock trading and I am confident that the banks and LPs behind FX pricing are watching and learning from the examples shown in the HFT equities space.