Forex News: Brokers Crack Down on “Flash” Trading Practices

Jul 12 • Market Analysis • 2336 Views • 1 Comment on Forex News: Brokers Crack Down on “Flash” Trading Practices

Breaking forex news highlighted the growing concerns of forex brokers over potentially predatory practices by so-called ultra-fast or high-frequency traders (HFT). Interdealer broker ICAP said that its EBS trading platform would clamp down on “flash” orders and similar controversial trading activities. Flash traders use highly sophisticated technology that allows them to view orders made by other traders in fractions of a second before other market participants. This was seen as giving them an unfair edge as well as harming the transparency of the markets. Defenders of the practice, however, claimed that flash trading was necessary in order to provide liquidity for the exchanges.

EBS said that it would monitor practices such as flashing and pulsing, in which orders that cannot be filled or which are not at the best price are sent to venues in order to test liquidity and market pricing, as well as reviewing quote-to-price ratios. EBS said, however, that instead of punishing offenders with fines, erring traders would be suspended from the use of the platform. Forex news analysts believed that the move was a way for ICAP to improve its relationship with its clients in the investment banking sector, who had long been complaining that certain kinds of high-frequency trading practices could distort the markets.

The US equity market had already experienced the so-called ‘flash’ crash on May 6 2010, during which Dow Jones Industrial Average experienced a plunge of some 1000 points before recovering quickly in the space of a few minutes. The crash was recognized, on an intraday basis, to be the biggest single one-day point decline in the history of the Dow. According to a report by US regulators, the ‘flash’ crash was caused by the sale of some $4.1 billion in stock index futures by an institutional investor, which was completed in just 20 minutes and sparked a rash of computer traders’ automated selling. In turn, this wiped out close to $1 trillion from the value of US shares for several minutes. The seller of the futures was later identified as a money manager for asset management firm Waddell & Reed, although the report did not satisfactorily explain why he demanded that the transaction be executed so quickly.

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Although the report did not recommend further regulatory measures in response to the flash crash, forex news reports said that regulators and traders continue to be concerned about the growth of high frequency trading, which uses advanced technology and speed to make trades that generate extremely thin profit margins. HFTs could damage the liquidity of the equity markets by making price quotes disappear almost as quickly as they appear. In addition, authorities have also expressed concern that HFTs could result in market instability or even make them subject to outright manipulation.

This forex news broke amid an announcement by Tradition, the interdealer brokerage arm of the Swiss Compagnie Financiere Tradition, that it would launch a new trading platform. The traFXpure platform, which is being backed by five major global investment banks, including Barclays and Deutsche Bank, would discourage high frequency trading by ensuring that they would provide firm executable prices to the currency markets.

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