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 lets
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.
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