Exclusive: EBS take new step to rein in high-frequency traders
By Wanfeng Zhou and Nick Olivari
NEW YORK (Reuters) - One of the largest currency dealing platforms, ICAP's EBS, this week took a step to curb high-frequency trading on its network, the latest in a series of measures in the $5 trillion-a-day foreign exchange market to limit the perceived advantage of super-fast traders.
On Monday, EBS introduced a so-called "latency floor" - the industry term for trading speed - on trades in the Australian dollar/U.S. dollar currency pair, the fourth most actively traded cross.
Under the move, messages transmitting orders in the Aussie cross will be bundled into batches and then run through a process that randomizes their place in the queue. That could help level the playing field because the first message to hit the system will not necessarily the first order processed. The speed of the randomization process is between one and three milliseconds, EBS said. One millisecond equals one thousandth of a second.
High-frequency traders use powerful computer models to pump a large number of often small orders at a super-fast pace. For second-tier banks, asset managers and corporates who come to the FX market to do cross-border trade or hedge risks, this activity is making it harder to get the best prices before HFT firms.
Reuters first learned of the development from market participants, who declined to be identified, and an EBS spokesman later confirmed the move. Thomson Reuters Corp., the parent of Reuters, competes with EBS in foreign exchange trading through its Thomson Reuters Dealing platform.
EBS has informed market participants that it intended to extend the latency floor to the dollar/Swiss franc crosses, the fifth-busiest pair, as well after a period of assessment and analysis.
The growing prevalence of high-frequency trading has raised concerns about the fairness of markets and whether those with the fastest technology are putting others at a disadvantage or creating dislocations as a result of their speed. Currency platforms, which have players including banks and corporations, have recently shown resistance to allowing high-frequency trading to proliferate, and the head of EBS recently voiced his own concerns.
"We're not in the business of providing race tracks. We're providing a market for everyone," EBS Chief Executive Gil Mandelzis said in an interview with Reuters in late June. "We're not anti-HFT. We're against speed-only strategies." Continued...