Erik Lehtis
Erik Lehtis

Gearing up to meet the challenges of High Frequency FX trading

As financial markets move into a phase of heightened regulatory attention in the securities industry, high frequency traders are eager to explore new areas of opportunity. For many, foreign exchange is the New World. Offering the deepest liquidity of any market, along with tremendous volatility and fascinating currency-by-currency characteristics that make each trading pair unique, FX is a fantastic world to explore at any frequency. However, be forewarned that unlike the New World of old, this one is already well-populated with savvy, well-funded and well-established participants, undisturbed stretches of golden opportunity are rare, and success is far from assured. Some of the challenges are common to HFT, but others are unique to FX. So let’s explore some of these, to better prepare you for your exciting journey into HFT in FX.

Having been in the FX market in one role or another since around 1980, I’ve seen the market expand (California-based bank trading desks and investment bank participation in the interbank market in the 80’s, non-bank participation via prime brokerage in the 90’s) and contract (closing those Calif.-based branches in the late 80’s, bank merger mania, Y2K and Euro fear in the late 90’s), volatility highs (during the 80’s) and lows (the mid-late 90’s), cycles of coordinated central bank intervention to knock the dollar down (the Plaza Accord in 1985) and to prop it back up (the Louvre Accord of 1987), and the impact of technology on how business is done, starting with Reuters Dealing (1981), EBS and Reuters matching in the early 90’s,. However, nothing in my opinion has had the transformative impact on the FX marketplace the way that high frequency trading has, and in particular HFT participation by non-bank proprietary trading firms. Liquidity transfer It...continued

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