High Frequency Trading - Forex Markets 2011 Update

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The term High-Frequency Trading (HFT) basically means “trading where speed matters. The recent growth in trading, high-frequency decisions have become common. In most cases, HFT systems can process information in less than a second. In the world of Forex trading people can make millions in seconds. It is rather complicated and risky; however it can generate great profits. http://www.investtechfx.com

InvestTechFX - There are a number of factors that are in play when it comes to predicting the trends of the Forex markets. There are also a number of ways to trade the markets. In this article, InvestTechFX would like to further educate those who are interested in Forex trading on the subject of High Frequency Trading (HFT). We will take an in-depth look at the History and Future of High-Frequency Trading

Part 1: The History of HFT

InvestTechFX is a software solutions company providing the MetaTrader4 trading platform for online Forex trading. MT4 is an Electronic Communication Network (ECN) which is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies.

InvestTechFX is a No Dealing Desk (NDD) and Straight Thru Processing (STP) Forex company that offers an industry leading ½ pip while trading with the MT4 platform. The firm itself does not provide liquidity and therefore processes the clearing transcations for all Forex deals through the Interbank, which is the main liquidity provider, taking all of InvestTechFX’s deals in the international Forex trading market.

Before moving on the subject of HFT we should first examine the terms NDD and STP. Firstly it is important to explain the notion of a dealing desk and a non-dealing desk. InvestTechFX operates strictly as a non-dealing desk. In the Dealing Desk model almost none of the orders executed through a broker ever reach the actual market but rather stay in that broker’s inner liquidity pool. Spreads and quotes are decided by the broker. A DD broker is a specific broker who employs dealers that may either accept or reject orders from retail traders (re-quotes) depending on whether or not the broker is interested in accepting the specific order or not. A Non-Dealing Desk broker, such as InvestTechFX, doesn't interfere in the dealing process providing their clients direct access to the interbank Forex market. In the past this kind of brokerage was the privilege of institutional clients with large sums and huge trading turnover. With recent technological developments it has become available even for the retail trader and common individuals who wish to hit the markets.

Now let’s quickly take a look at the term Straight-Through Processing (STP). InvestTexhFX operates as an STP. STP enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions. The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.

The term High-Frequency Trading (HFT) basically means “trading where speed matters”. This concept has existed for over ten years and is most prominent in the United States and in Europe. Considering the recent growth in trading, high-frequency decisions have become common. In most cases, HFT systems can process information in less than a second. InvestTechFx, the leading ½ PIP Forex company offers the use of Expert Advisors while trading. This option, which is part of the MT4 platform, enables traders to develop Expert Advisors (EA), custom indicators and scripts. MetaTrader's popularity largely stems from its support of algorithmic trading.

There are five primary types of HFT strategies: market making (liquidity-providing strategies), market structure and statistical arbitrage (relying on observed differences from past trading patterns). In addition, there is the latency arbitrage strategy, consisting of inter-listed arbitrage (a strategy by which trades are made between domiciles) and intra-listed arbitrage (a strategy by which trades are made between marketplaces). Another common HFT strategy is information arbitrage, which consists of index arbitrage (which profits from mispricing between an index’s future and underlying stocks), exchange-traded fund arbitrage (a strategy by which trades are made against either the futures or underlying stocks or both) and momentum, which isn’t a strategy per se, but it attempts to trade security at a higher price; it also attempts to quickly predict where stocks will trade.

Most high-frequency traders (HFTs) are not well known, as they tend to opt for a low profile outside financial centres. These companies rely on certain skills that are easier to maintain without nearby competition. HFT often relies on very small opportunities in order to earn a profit. Because of the financial obstacles faced by HFTs, it is essential to minimize operating costs as much as possible. Although many HFTs opt to stay out of the spotlight, a few have become more outspoken because HFT of the increased popularity of HFT, increased scrutiny upon the industry and many firms’ plans to raise their capital by going public. Regardless of the presence of HFTs, such trading often occurs outside such companies, especially in brokerage firms.

HFT has been present in Canada for numerous years and many different strategies have become appealing to HFTs. With the introduction of new resources, more individuals have become involved in Canadian equity trading, especially as many companies made it increasingly feasible for new participants to enter HFT. The TMX, a former monopolizing body in HFT, has battled newfound competition in the industry. TMX is an exchange group that owns and operates several businesses involved in trading in Canada. The TMX Group, through its subsidiaries, operates derivative, energy, cash and equity trading facilities. The group also provides other financial services such as data products and clearing facilities. It is headquartered in Toronto, but has several offices throughout Canada.

In the United States, it is estimated that over 60% of market activity is, essentially, high frequency while in Canada, just 35%, approximately, is high frequency in nature. It is believed that 15–20% of that figure results from a special incentive program offered by the TMX.

In Canada, HFT participants have noticed a confluence of developments as HFT has continually grown in recent years. As a result of the increased trading activity in HFT, traditional trading activity has been obscured. Broker attribution has also been affected. As competition for the passive fills has increased, trading strategies have become more active.

In an authoritative report from the Canadian Imperial Bank of Commerce entitled “Fight Frequency Trading: A Canadian Perspective” it is revealed that High Frequency Traders have been operating below the radar for quite some time now. By nature, High Frequency Trading relies on very small opportunities for profit. It is scale that grants the ability to generate sustainable returns; as such, costs are critical.

“High Frequency Trading has been in Canada in a number of forms for many years… Over the past couple of years, changes in the market structure in Canada made it more appealing to High Frequency Traders (HFTs). The entrance of new continuous books/alternative trading systems (ATSs) and dark pools (TriAct MatchNow) challenged the TMX’s monopoly on Canadian equity trading.” (Canadian Imperial Bank of Commerce, Whitepaper, October 20, 2009)

Part 2: The Future of HFT

Considering many of the issues plaguing high-frequency trading (HFT), marketplaces may be likely forced to address the concerns of their customer bases. InvestTechFX has, in the past, been affected by some cases where clients have been involved in hacking incidents including high-frequency trading. These individuals were using unauthorized EAs that trade with 2 different IP addresses, and were able to interrupt signals to the liquidity provider as a result of the numerous signals they sent. At present, the liquidity provider has been able to overcome and filter such trades.

There will likely be further changes made to the TMX’s Electronic Liquidity Provider (ELP) program’s rebating system as pressure from the dealer community increases. The ELP rebate system directly targets the end client, as opposed to the broker. Thus, the rebates are received by sophisticated, knowledgeable clients. However, these rebates put stress on the relationships with many dealers, as dealers have been forced to become more active in trading, thus raising their fees. Nonetheless, economic interest will prevail. Due to the lack of funding for other marketplaces, the cost of the rebate program will continually decrease.

Additionally, a reduction in incentives from the ELP program would be both likely and logical. With this reduction, there will be an elimination of either broker identification on the exchange or the internal cross rule. Alternatively, the reduction may also force ELPs to either mark their trades, in order to provide additional information when needed, or trade anonymously, thus reducing their fill rates by 5–10%. As another possibility, there may be continued cuts made to the marginal ELP passive rate or individuals may be forced to pay for the benefit offered by the internal cross rule.

After a recent committee meeting, it was determined that marketplaces are responsible for protection against trade-through. In order to relieve markets of trade-through obligations, immediate action orders should be used. During this meeting, it was also recommended to continue with book trading through protection. Some challenges may arise in the implementation of these decisions, which may make strict adherence unfeasible. Controversy also arose regarding fee caps and the necessity of the regulation of exchange fees.

In Canada, market data is unregulated and thus exchanges are permitted to charge whatever fees they consider as reasonable. Because of this lack of regulation, certain challenges arise. Many market participants feel concerned when marketplaces attempt to increase profits from market data without providing fair value thus, participants may feel forced into using a product they do not desire. As a solution, instead of regulating fees, it may be more appropriate to allow electronic trading via brokers. Such a change would also allow participants to exercise more control over their trading activities.

During the meeting the committee also discussed the levels of trading rebates. Some individuals believe that competitive bodies may increase rebate inflation past reasonable levels. It is also believed that the United States’ fee caps may trigger an evolution in the Canadian context, which would allow Canada to remain on par with U.S. market activities. Most likely, rebates have been increased in order to promote new business. Also, free markets will be able to continuously meet the needs of customers. Essentially, marketplaces would balance the needs of the liquidity providers with those of liquidity customers; fees will be adjusted accordingly. Also, some market makers may not rely on rebate spreads. Transparent competitive forces will definitely assist in creating price discovery. If any trading fee caps arise, they should be rational. If caps on rebate are implemented, they should not exceed the minimum tick size.

InvestTechFX processes the clearing transactions for all Forex deals through the Interbank, which is the main liquidity provider, taking all of InvestTechFX’s deals in the international Forex trading market, and doing over $100 million in trades per day.

The Forex market is very dynamic, lucrative and at the same time rather volatile in nature. Both Microeconomic and Macroeconomic factors govern the volatility and fluctuations in Forex rates.

InvestTechFX has tens of thousands of customers worldwide. We encourage those clients and all other people who are interested in trading to be aware of the various factors and subjects that affect the world of Forex markets. We have great pride in providing the highest level of customer support and service, while providing the lowest fixed spreads (0.2 pips) striving to be an industry leader in the world of Forex Trading.

InvestTechFX recently reduced their fixed spreads from 0.5 PIP to 0.2 PIP for 3 majors. The 0.2 PIP FIX will be available until the end of 2011. This incredible opportunity is being offered to valued existing customers as well any new customers with the intention of providing more benefits including bonuses and Index options beginning in 2011. InvestTechFX, a NDD (No Dealing Desk) and STP (Straight through Processing) Software Solutions Company, is excited about the new promotions and urges customers to take advantage of this fabulous opportunity immediately. http://www.investtechfx.com


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