The Rise of HFT in the Forex Market

Before y’all start guessing what HFT stands for (Hot Fudge Tundae? Probably not!), lemme stop you right there to tell you that it’s short for high-frequency trading. This refers to one of the many kinds of algorithmic trading strategies that involves lightning-fast execution of multiple signals designed to take advantage of arbitrage or scalping opportunities.

This practice has already been widespread in the stock market before it eventually made its way into the forex arena a few years back. This was met with a lot of controversy, as HFTs have been blamed for having an unfair advantage, cornering the markets, and to some extent causing instability. After all, some algorithms are said to see orders milliseconds before other traders do while others are claimed to flood orders to confuse other market players. Heck, some FX institutions even teamed up to take action against these HFTs!

robot computer programEven so, the forex market share of these HFT firms has continued to grow, with algorithmic traders tripling their forex volume over the last three years. Around the same time, big banks have also scaled back their forex market activity as they have been subject to stricter scrutiny from regulatory watchdogs.

As reported in this Bloomberg piece, forex ECN FastMatch indicated that non-bank market makers now comprise 75% of trading activity on their platform while the larger financial institutions only make up the remaining 25%, down from their 55% share back in January 2015. On the LMAX Exchange, these high-speed market makers account for 60% of the liquidity while banks comprise 40%, a flip side of their share three years back.

Because of this shift, HFTs are able to argue that they are actually doing the forex industry a favor by keeping liquidity propped up. Firms such as Citadel Securities LLC, which quadrupled its currency trading volume after the Brexit vote, explain that they’re simply acting as counterparties to ensure that trade execution stays efficient and that they’re not using complex computer programs to manipulate prices.

John Shay of Vitru Financial Inc., another force to reckon with in the electronic trading arena, noted that high-speed traders were usually treated as the scapegoat for causing flash crashes or rigging prices but investigations have revealed that it is actually the big dogs such as Citigroup or JPMorgan that were to blame for those scandals.

Wall Street veterans such as Giovanni Pillitteri and Isaac Lieberman, formerly a trader from JPMorgan, have even gone on to head high-frequency market-making funds, supporting speculations that this industry shift to welcome more forex HFT activity could carry on. Of course this would likely attract much-needed regulation, which could then ensure transparency and fairness for all market players.

Do you think this rise in forex HFTs is good or bad for the industry? Don’t be shy to share your thoughts in our comments section below!