FX TRADING SYSTEMS
With the right soſtware, hardware and knowledge of the market, execution of any FX strategy can be improved and in trading, this can mean the difference between success and failure. Although significant money can be spent on a solution, the following outlines a robust solution within the budget of even most individual traders.
Liquidity
While FX is arguably the most liquid market in the world; this is only true for the major currency pairs, during the London aſternoon. If one wanted to execute EURNOK at 3am in the morning, it certainly wouldn’t hold true.
Currency Pair
Pct of Total Volume Figure 1
EURUSD 30.52%
AUDUSD 12.95%
To illustrate this, Figure 1 shows the average volume, by currency pair, for the five most active currency pairs, for the month of July 2013 on the KCG HotSpot electronic trading platform. Figure 2 shows the average volume by hour of the day (EST), reproduced with kind permission of KCG Hotspot. Both of these samples are very indicative of the overall market (See ‘Building Robust FX Trading Systems’).
Knowing the liquidity and spread for any currency pair at any time of day, is critical information in the execution, and ultimately, the viability, of any trading strategy. We therefore developed soſtware, in collaboration
with Cambridge Trading Research Ltd., to capture, store and chart, both the best bid and best offer, tick by tick, in any currency pair from ‘top of book’ to any depth. (‘Top of book’ refers to the best bid or offer in a market. For example EURUSD might be 1.31001/1.31006 ‘top of book’ in the interbank market i.e. a spread of only 5/10th of a pip. However that may only be in 1mio Euros.
If one
wanted to execute 10mio, the price would invariably be wider, and wider still for 20mio etc. (We are using ‘top of book’ in this article for illustrative purposes).
To illustrate the effect of time of day on spreads, Figure 3 shows the best
USDJPY 12.94%
GBPUSD 12.66%
USDCAD 7.80%
bid and offer in EURNOK over the course of the trading day. As we might expect, the spread widens out during the relatively illiquid Asian session (highlighted area).
As we might also expect, spreads widen during periods of uncertainty. Tis is illustrated in Figure 4 . Before the release of data in ‘normal’ market conditions the spread in EURUSD was less than 1pt wide and on the release of the data, the price widened to 1.3110/21; well over ten times its ‘normal’ spread. Although EURUSD is the most actively traded currency pair, and this example is during the most liquid time of day, when you would expect the tightest prices, we
30 FX TRADER MAGAZINE October - December 2013
can see that there are times when this rule doesn’t hold true. Similar widening of spreads occurs as the market breaks through key levels, such as previous highs, lows and trend lines. Terefore any strategy based on momentum, breakouts, or other key levels, tend to perform much worse than expected in actual trading, than in simulations. Even with the best intentions, and assuming a much wider than ‘normal’ market spread, the assumptions are oſten far too conservative, compared to real market conditions, at the moment a trade needs to be executed. Tis behaviour oſten leads to strategies that seem to
Figure 2: Percentage of daily volume, on KCG HotSpot, by hour, for June and July 2013
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