ALGORITHMIC FX TRADING


Presumably while cost is a factor, few clients are willing to sacrifice the fucntionality of their algo products, so some burden must fall on the vendors to meet his shortfall. Te cost issue has also been driving vendors’ efforts to design far more open system architecture that can support the creation and testing of fairly complex proprietary algorithmic trading strategies. And when it comes to the longevity of FX trading algorithms in an environment of such testing and analysis, Smith believes it is likely to lengthen rather than shorten the shelf-life of many algorithms. “Tere really is no final end game and clients are constantly tweaking their algorithms and strategies. In a market as dynamic and fluid as the FX market, there will always be a need for constant refinement.”


Tis is a view shared in part by Gerry Turner, executive director at Object Trading, a global provider of counterparty-neutral direct market access (DMA) for electronic traders of multiple asset classes. “Firms generally have an idea of what their algorithms are intended to do and if the algo still makes money, they will continue to use it,” says Turner. “I’m not sure that increasing or decreasing latencies are affecting the algos.”


Latency


What Turner does note, however, is that there appears to be an effort among the large banks that dominate the FX market to try to ‘commoditise latency’. In the FX market world there is more fragmented liquidity than in the equities world, given that there are a limited number of currencies but an increasing number of price providers and latency is seen as a differentiator by many of the liquidity providers, says Turner.


Tis has led to a race for low latency and increased certainty from trading technology providers as well as the traders themselves. But after a period of sustained spending on reducing latency, especially in the equities market, there is evidence of a desire among the big banks that provide the majority of the prices in the FX market to commoditise latency, so that it can be removed from the equation and liquidity providers can go back to competing on price or other factors such as the depth of the market, the cost of execution or the range of the clearing services.


It is a development that is both logical and surprising, says Turner. “It is very surprising that banks have started to collaborate even though the logic is clear. Te arms race we have seen in the last few years in terms of spending on latency- reducing technology


104 | july 2012 e-FOREX Gerry Turner “If the market becomes more convergent in its use of technology, then this means that algos should


have more optionality, venues will be easier to access and the markets will behave in a more predictable way and react in similar timeframes.”


has not helped anybody and by levelling the playing field, they will be able to return to the days when price was king. Te banks realise that they don’t want to lose out to smaller venues that may have marginally better technology and lower latency and would rather compete on other factors with a more rewarding return on investment than is currently the case in terms of low latency technology.”


When banks begin to collaborate in an effort to level the playing field, it is not always a positive development - especially if it involves price-fixing of some kind – but, says Turner, in the context of commoditising latency, algorithmic FX traders should benefit. “If the market becomes more convergent in its use of technology, then this means that algos should have more optionality, venues will be easier to access and the markets will behave in a more predictable way and react in similar timeframes.”


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88  |  Page 89  |  Page 90  |  Page 91  |  Page 92  |  Page 93  |  Page 94  |  Page 95  |  Page 96  |  Page 97  |  Page 98  |  Page 99  |  Page 100  |  Page 101  |  Page 102  |  Page 103  |  Page 104  |  Page 105  |  Page 106  |  Page 107  |  Page 108  |  Page 109  |  Page 110  |  Page 111  |  Page 112  |  Page 113  |  Page 114  |  Page 115  |  Page 116  |  Page 117  |  Page 118  |  Page 119  |  Page 120  |  Page 121  |  Page 122  |  Page 123  |  Page 124  |  Page 125  |  Page 126  |  Page 127  |  Page 128  |  Page 129  |  Page 130  |  Page 131  |  Page 132  |  Page 133  |  Page 134  |  Page 135  |  Page 136  |  Page 137  |  Page 138  |  Page 139  |  Page 140  |  Page 141  |  Page 142  |  Page 143  |  Page 144  |  Page 145  |  Page 146  |  Page 147  |  Page 148  |  Page 149  |  Page 150  |  Page 151  |  Page 152  |  Page 153  |  Page 154  |  Page 155  |  Page 156  |  Page 157  |  Page 158  |  Page 159  |  Page 160  |  Page 161  |  Page 162  |  Page 163  |  Page 164  |  Page 165  |  Page 166  |  Page 167  |  Page 168