The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

Getting to Grips with Latency for HFT in FX

There has been much discussion recently around the impact of high frequency trading (HFT) on the financial markets. There is no doubt that the concept of HFT, analysing market information such as stock prices to implement proprietary trading activity in a matter of seconds, has many advantages. This includes greater market liquidity, lower transaction costs and faster access to pricing.

However, until recently, HFT has only really been active in equities and derivatives. Today, we are seeing a fundamental shift of HFT into other asset classes such as foreign exchange (FX), as traders search for new ways to achieve greater liquidity during these unpredictable economic times. It is easy to see why demand is high, a low margin of relative profit is an attractive proposition for any trader. Although, not everything has been plain sailing for HFT in FX. For example, in March this year, we witnessed a crash of Japanese yen in FX following a computer programming trade order that went wrong and distorted the markets. As a result, this caused liquidity in the FX market, which trades billions of dollars worth of currencies daily, to instantly grind to a halt.

The sheer scale of the Japanese crash is clear evidence that there is a high demand for FX transaction volumes with HFT. Therefore, for traders selling FX investment services to asset management companies, the speed and optimisation of price setting is imperative. This is because speed of prices in a highly volatile and unpredictable market is critical to perspective buyers. Without this, they are unable to make well informed investment decisions.

This is where low latency comes in as a key factor when setting pricing. Latency has traditionally been one of the most unspoken aspects of trading currency, often because traders only care about what prices are immediately on their screen, and not how it gets to their desktop in the first place. It is also important to point out that within FX, everything is traded over the counter (OTC), a little bit like derivatives. This is because there is no physical trading location or exchange. Indeed, there is a certain irony in the fact that there is no ‘exchange’ in foreign exchange.

The points above, together with the time zone and geographical scattering of FX, means that the locations of the servers in relation to the data centre is a major key to future HFT success in this particular asset class is.  The most effective way to limit latency is to make sure the physical location of the trader’s servers is in close proximity to the data centre. For example, our own London arbitrage centre, which is the hub of FX trading operations, uses fibre optic networks to provide ultra low latency. As a result, traders canprofit by providing competing pricing bids faster than their competitors. So, as HFT activity continues to accelerate, the question should be, which asset class is next to come under the HFT spotlight? One thing is for certain, FX is not the first and certainly won’t be the last asset class to be impacted by HFT. If there is liquidity available, some bright spark in the square mile will find new and innovative ways through technology to find it.

Related content

WEBINAR

Recorded Webinar: Best practice solutions for client lifecycle management

This webinar has passed, but you can view the recording by registering here. The challenges of client lifecycle management continue to increase, driven by regulation and requiring financial institutions to review processes around client onboarding, Know Your Customer (KYC) and client data maintenance. The webinar will outline the challenges faced by financial institutions, discuss best...

BLOG

The Deal is Done – LSEG Completes Acquisition of Refinitiv

A big day in the City last Friday as the London Stock Exchange Group (LSEG) completed its all-share acquisition of Refinitiv first mooted back in July 2019. The acquisition is expected to create a leading, UK-headquartered, global financial market infrastructure provider with a strong data and analytics business, significant capital market capabilities across multiple asset...

EVENT

TradingTech Summit Virtual

TradingTech Summit (TTS) Virtual will look at how trading technology operations can capitalise on recent disruption and leverage technology to find efficiencies in the new normal environment. The crisis has highlighted that the future is digital and cloud based, and the ability to innovate faster and at scale has become critical. As we move into recovery and ‘business as usual’, what changes and technology innovations should the industry adopt to simplify operations and to support speed, agility and flexibility in trading operations.

GUIDE

Entity Data Management Handbook – Third Edition

Welcome to the third edition of the Entity Data Management Handbook which is available for free download. In this updated edition we delve into the role entity data plays in the smooth running of financial institutions and capital markets, the challenges of attaining high quality data, and various aspects, approaches and technologies involved in managing...