My attention has recently been drawn to an academic research paper entitled High Frequency Trading and The New-Market Makers. The author, who is from the VU University in Amsterdam, investigates the connection between high frequency trading and the emergence of new exchanges here in Europe:
It shows how the success of a new market, Chi-X, critically depended on the participation of a large HFT who acts as a modern market-maker. The HFT, in turn, benefits from low fees in the entrant market, but also uses the incumbent market Euronext to offload nonzero positions.
To summarise the findings:
One particular set of broker IDs matched across markets shows the characteristics of an HFT that acts as a market maker in both the entrant market (Chi-X) and the incumbent market (Euronext). In each market, four out of five of its trades are passive, i.e., the HFT was the (liquidity-supplying) limit order in the book that got executed. It makes money on the spread but loses money on its positions. If this positioning loss is decomposed according to duration, one finds that positions that last less than five seconds generate a profit whereas the ones that last longer generally lose money. The HFT is equally active in both markets as roughly half of its trades are on Chi-X and the other half are on Euronext.
The paper shows how fees are a substantial part of a high-frequency trader’s profit and loss account. It is therefore not surprising that new, low-fee venues have entered the exchange market as they are attractive to these ‘modern’ market makers. It is shown that such lower fees are, at least partially, passed on to endusers through lower bid-ask spreads. This evidence adds to the regulatory debate on high-frequency traders and highlights that a subset is closely linked to the rapidly evolving market structure that is characterized by the entry of many new and successful trading venues.
This research seems to suggest that high frequency trading is actually a good thing, both for the "New-Market makers" themselves and the beneficiaries of the resulting lower bid-ask spreads on new exchanges such as Chi-X.
However this view doesn't seem to be held by regulators on both sides of the Atlantic, since as we discussed back in 2009, both SEC chairman Mary Schapiro and the then UK "City minister" Lord Myners held the view that:
We need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated.
It seems as though the US legislative authorities have been as good as their word, since one of the references at the back of HFT & The New-Market Makers is another academic paper. This one is entitled "The Flash Crash: The Impact of High Frequency Trading on an Electronic Market", and the authors hail from another US regulator. In this case it's the CFTC. They conclude:
Based on our analysis, we believe that High Frequency Traders exhibit trading patterns inconsistent with the traditional definition of market making. Specifically, High Frequency Traders aggressively trade in the direction of price changes. This activity comprises a large percentage of total trading volume, but does not result in a significant accumulation of inventory. As a result, whether under normal market conditions or during periods of high volatility, High Frequency Traders are not willing to accumulate large positions or absorb large losses. Moreover, their contribution to higher trading volumes may be mistaken for liquidity by Fundamental Traders.
We conclude that HFTs did not trigger the Flash Crash, but their responses to the unusually large selling pressure on that day exacerbated market volatility.
Not exactly the same conclusion as the Dutch paper then, and not exactly a clean bill of health either. However exacerbating market volatility isn't quite the same thing as destroying Western capitalism as we know it.
Not content with leaving these matters to the Anglo Saxons, it seems Angela Merkel and Nicolas Sarkozy have been discussing similar issues recently. According to the Daily Telegraph Mr Sarkozy said:
The French and German ministers will table a joint proposal at EU level next September for a tax on financial transactions. This is a priority for us.
This so called "Tobin Tax" has been previously mooted as one way of making high-frequency trading unprofitable, and thereby ridding the world of its menace once and for all. According to the Telegraph once more:
The plans by Germany and France to introduce a financial transaction tax (FTT) could raise a total €80.9bn (£70.7bn) – of which €58.3bn would come from UK-based businesses.
As you may be able to imagine, this Continental concept hasn't gone down too well with some of the aforementioned UK-based businesses. In particular Michael Spencer, founder and CEO of ICAP and last year's Ernst & Young World Entrepreneur Of The Year, seems to have taken a very dim view of it. According to Mr. Spencer:
This tax would destroy the City and cost the Exchequer billions, but it would benefit Brussels. Companies like ICAP will simply move elsewhere outside the EU if Nicolas Sarkozy and Angela Merkel push ahead with this silly tax.
Unlike their Labour predecessors, it seems as though the current Tory government isn't wild about the plan either:
Last week, Treasury sources signalled that Britain would be prepared to veto such a tax if Paris and Berlin succeed in bringing the plan to a vote among 27 EU members.
I'm sure that Mr. Spencer's donations to the Tory party have no bearing on any of that, but all these conflicting signals are nonetheless terribly confusing. If you're currently an Anglo Saxon high frequency trader now would seem like a prudent time to consider plan B, if you haven't done so already.
Yesterday evening customers of UK spreadbet and forex/CFD broker Smart Live Markets received an email announcing that:
According to the email:
The reason for this change is cosmetic. As we have grown globally as a company it has been apparent that some people have been confused by our name, so we have chosen a more generic name which as a brand going forward will be far more easily recognised throughout the world.
When I enquired about why such a "cosmetic" change was necessary I was told that the Smart Live brand is associated in many people's mind with the gaming industry, and that such an association is likely to be a hindrance to the expansion of Smart Live/GKFX in the Middle East. It seems that while spread betting is classified as gambling in the UK, trading forex and CFDs is not in the rest of the world (or in the UK for that matter!).
When I further enquired about the significance of the GKFX name I was told it was a four letter domain name ending in FX that happened to be available. According to Smart Live's entry in the FSA register it stands for Global Kapital FX, but apparently for some reason no marketing will be done using that version of the new name!
Fresh from having their UK subsidiary fined by the CFTC earlier this month, FXCM have now been fined $2 million by the National Futures Association. Once again the complaint against FXCM and their CEO Drew Niv and details of the agreed settlement have been published simultaneously. Once again FXCM neither admit nor deny the allegations in the complaint, which concern FXCM's failure to pass on positive slippage from their liquidity providers to their customers, and lapses in their anti money laundering procedures. However this time around FXCM's customers do stand to benefit financially since one of the agreed sanctions states that:
Within 30 days of the effective date of this decision, FXCM shall make a good faith effort to credit the accounts of its customers the amount of positive slippage which its customers experienced on their trades from and after June 18, 2008
AlgoTrader today announced a new open source algorithmic trading platform. AlgoTrader is an automated trading system that can trade any type of security on any market available through Interactive Brokers and/or the FIX protocol (real soon now!). All aspects of trading such as obtaining market data, analyzing prices, taking trade decisions, placing orders & tracking executions can be automated. The new platform uses the Esper complex event processing engine, and is based on Java SE 6.0, Spring, and a Model Driven Architecture.
An initial version of AlgoTrader is now available Open Source at http://code.google.com/p/algo-trader/
Features of the system include:
- Automates trading strategies based on trading rules (using Esper EPL)
- Automated execution via different broker interfaces
- Backtesting and simulation of trading strategies based on historical data
- Portfolio tracking & performance measurement
In the interests of transparency I should point out that I'm a member of the AlgoTrader development team. If you are interested in contributing to the project too then please get in touch.
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Last October we wondered what steps the CFTC would be able to take to enforce the new forex trading regulations that had just come into force, particularly when it came to pursuing offshore brokers in offshore courts. Back in January they sued a few brokers using the US courts. Now they have used a different approach, which still hasn't required the CFTC to state their case in a foreign jurisdiction. It seems all they need to do is to ask nicely for some money!
The CFTC has just announced that it has:
Filed and simultaneously settled charges that Forex Capital Markets Ltd. (FXCM Ltd.) of London, U.K. acted as a retail foreign exchange dealer (RFED) by conducting retail leveraged forex transactions with U.S. customers without registering with the CFTC under the agency’s regulation 5.3(a)(6)(i). FXCM Ltd. has never been registered with the CFTC in any capacity.
The CFTC order requires FXCM Ltd. to pay a $140,000 civil monetary penalty and to cease and desist from further violating CFTC regulation 5.3(a)(6)(i).
According to the CFTC order instituting proceedings:
The Commodity Futures Trading Commission ("Commission") has reason to believe that from October 18,2010 to October 29, 2010, Forex Capital Markets Ltd. ("FXCM Ltd." or "Respondent") violated Commission Regulation 5.3(a)(6)(i), to be codified at 17 C.F.R.§ 5.3(a)(6)(i). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted to determine whether Respondent engaged in the violation set forth herein and to determine whether any order should be issued imposing remedial sanctions.
Whether in the public interest or the interest of their shareholders FXCM seem to have thought it was prudent to settle this issue without getting as far as a court in either the US or the UK. According to the CFTC order once more:
In anticipation of the institution of an administrative proceeding, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Without admitting or denying any of the findings or conclusions herein, Respondent consents to the entry of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, As Amended, Making Findings and Imposing Remedial Sanctions ("Order") and acknowledges service of this Order.
Nothing's been admitted or proven, but FXCM UK have agreed to become a bit poorer, and the US authorities a bit richer. How is any of this in the interests of the members of the US public who allegedly placed some trades via FXCM UK during those 11 days last October?
Saxo Bank, the online trading and investment specialist, today announced the launch of ForexTrading.com which will offer retail investors a select range of FX crosses and CFDs with variable spreads – as low as 0.8 pips.
Those spreads are not only variable, they are also significantly smaller than the spreads available to Saxo's existing retail clients through the SaxoTrader and WebTrader platforms. Here's a quick comparison between two demo accounts, with the new ForexTrading.com first:
Something else that has reduced is the minimum initial deposit, which is down to $2,000 for the new accounts. Obviously there is a price to be paid for these benefits. You trade using cut down versions of SaxoTrader and/or WebTrader, which only allow you access to a limited selection of the most liquid FX pairs (both spot and forward) and commodity CFDs:
If you want to trade stocks, futures or options you'll still need a "classic" Saxo account. If you can live without those instruments however, on a ForexTrading.com account all communications will have to be in English, and trading is not available via telephone. The new accounts have to be funded by wire transfer initially, but after that instant top-ups using debit or credit cards are available. That might come in handy, since leverage on the most liquid pairs can go as high as 1:200! You might well infer from that fact that these new accounts are not available to citizens of the United States, and you would be correct to do so.
Assuming you're not from the U.S. and you've funded your account there are a numbers of ways of placing a trade, but all of them are manual! Once upon a time Saxo did support automated trading via Trade Commander, but not any more it seems. We took a look at Saxo's Web Trader platform when MSN Trader was launched, so for now we're going to concentrate on the desktop platform. Here's a view of an FX order ticket:
As you can see there are a variety of ways of entering a variety of order types, and on FX at least market depth information is made available to you. Minimum order size for forex is 5,000 – midi lots I suppose?
If all that information seems like it's too much to handle, you can look at a table of your favourite instruments instead:
If you click the little "Trade" check box the quotes turn into green buttons, and you can perform a one click trade by just clicking one of them. Note too that "Gold" is available either as spot "FX" or as a futures style CFD complete with expiry date. That no doubt explains why the "Value Date" box which allows you to select a forward date for FX pairs is grayed out for gold. Along with the other commodity CFDs, there is also a "continuous" version of gold of the sort familiar to futures traders. This merges the different contract expiries into a single set of data that can be charted and/or analyzed without any sudden jumps at expiry, but can't be traded.
There you have our first quick impressions of Saxo Bank's new retail brokerage offering. It looks like it's going to be worth a very close look at a practice account if you're happy trading manually and you have in your possession at least $2,000 you're willing to lose. However if you're into automated forex trading like us, or you're from North America, unfortunately you'll need to look elsewhere. As things stand at the moment ForexTrading.com isn't going to see off MetaQuotes.net just yet.
We suggested just after Christmas that FXCM were building an acquisitions war chest, and that's how things are now starting to pan out. At the beginning of this month the Wall Street Journal reported that:
FXCM had agreed to buy the retail trading business of GCI Capital of Japan, adding 20,000 active accounts to the online foreign exchange broker.
Now FXCM have announced in a press release that the deal has been finalized:
FXCM has acquired the retail FX business of GCI Capital Co. Ltd of Japan for $5 million net of cash received, subject to certain adjustments. GCI Capital's retail FX business, which has been operating under the FXCM Japan brand, will provide an excellent complement to FXCM's recent purchase of ODL Japan. The two entities will combine and operate as FXCM Japan, under the FXCM Inc umbrella.
We also suggested not long ago that more forex lawsuits were on the cards, and FXCM has been on the receiving end of another one this month. According to Michael Greenberg at Forex Magnates an analyst's downgrade after FXCM's recent IPO on top of that first lawsuit led to a fall in FXCM's share price, which in turn led to a securities class action lawsuit against FXCM.
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