Jaya Smitha Menon

September 3,2014:The old saying, ‘pen is mightier than the sword’, gets new validation. Recently, financial author Michael Lewis proved this adage right with his latest book Flash Boys: A Wall Street Revolt, which came out as a crackdown on high-frequency traders. While the book received mixed reviews, it stirred up conversations and controversies in all the major financial streets of the world.

The book chronicles the journey of Brad Katsuyama, a trader at Royal Bank of Canada who suddenly feels out of place and unsuccessful in the world of electronic trading. He goes on to find out the real story behind the algorithmic high speed electronic trading.

Katsuyama, doesn’t just stop by finding out the real issue, but takes a bold step to correct the issue by starting his own exchange, which aims to give investors a fair trade, which he knows that investors are not getting today thanks to high frequency trading. Lewis claims that with the book he aims to restore trust and credibility to financial markets.

The book was a much-awaited release by the financial markets and was in the spotlight even before its release on March 31, 2014 with traders, regulators and investors up in arms against each other and on the author.

Why is the book controversial?

Primarily, the book created furore in the global financial markets with the claim that markets are rigged by high-frequency traders who take front running advantage on the orders placed by investors.

The US regulatory authority SEC chairwoman Mary Jo White defended Wall Street by saying that markets are not rigged though it is not perfect. Soon after the release, FBI ordered investigations into high frequency trading and market manipulations and later even fined NYSE for $4.5 million for violating the rules.

Charles Schwab, Founder and Chairman of Charles Schwab Corporation, along with Walt Bettinger, President and CEO, in a statement referred to HFT as a “growing cancer that needs to be addressed.”

“High-frequency trading has run amok and is corrupting our capital market system by creating an unlevelled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges”, they said. “As Michael Lewis shows in his new book Flash Boys, the HFT cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders.

Dennis Kelleher, President and CEO of Better Markets, an independent non-profit organisation that promotes public interest in the financial markets, while agreeing with Lewis that markets are rigged by insiders for insiders, says, “None of this is news to Better Markets, which has been pushing regulators and policymakers for years to take action to stop predatory HFT, which is not only ripping off investors and retirees, but is also destroying confidence in our markets. Over the last three years, Better Markets has filed 15 comment letters with the SEC and CFTC focusing on or discussing HFT and has had numerous meetings urging them to take action. In addition, Better Markets’ staff has testified often before Senate and House committees on the problems caused by HFT and the need for strong, clear rules to stop abuses and illegal conduct.”

US Senator John McCain, in his statement on the high-frequency trading (HFT) controversy to the Congressional Record, referred to the book and said, “If true, Lewis’ claim that the market is rigged through variations of HFT could potentially affect everyone from institutional investors to any individual who pays into a pension or mutual fund. He added, “Congress, as well as regulators at the SEC and CFTC should fully investigate these issues and pursue proposals that can minimise systemic risk and bolster trust in our markets. But, we cannot ignore the inherent limitations that exist in regulating an issue as complex as HFT.”

The book has been widely criticised for not taking into consideration the views of HFT traders. However, Lewis has done his job — turning the world’s attention to HFT, which is discussed in the same fervour today as sub-prime mortgage was discussed after the financial crisis. Traders are crying foul, regulators are running amok and exchanges are tying loose ends. What more could a book achieve? Will it lead to more scrutiny and action on trading practices is something we have to wait and watch.

The post Flash Boys turns the heat on high-frequency trading appeared first on International Finance.

4th December 2013

For FX traders, overcoming slippage is one of the biggest challenges for maintaining potential profitability. Thankfully there is a two-step weapon for combatting slippage, a tactic and technology choice that those leading the market have already discovered and implemented.

Without affinity to any provider, we can share the secret that will help control the effects of slippage. The strategy is simple – it is knowledge. The technology is even simpler – ultra-low latency connectivity between trading hubs and local economies.

Once you understand the implications of slippage and possess the necessary market knowledge, you can begin to minimise your loss potential. Trade transaction costs occur due to a gap in time, which if amplified can result in critical losses. This is a particular concern if conducting a substantial amount of trades in a day – a strategy that applies to High Frequency Trading (HFT) and Algorithmic Trading companies.

Thankfully you can reduce this gap, both with high performance global connectivity and a local trading presence.

Gareth Richardson, Managing Director, Custom Connect UK

Making the World Faster and Smaller

Connecting key FX liquidity sites spread across the world in an optimised manner is often easier said than done. Geographical dispersion naturally has an effect on network latency –the speed that data, and thus potential money / profit, is being transferred at.

The more trading locations, data centres, and local access partners you have, the more ‘ears’ you have on the ground. However, the larger the arsenal,the better the network has to be to ensure your trading presence can deliverits maximum return on investment (ROI). There is also the need for an increasing amount of local knowledge from a range of perspectives when you scale across the world – carrier choice, technology and functionality, cost effectiveness and general integration concerns.

If you have a sluggish network –infrastructure with latency in the millisecondsor even slower, full seconds – you will not be able to keep up with the competition, nor keep on top of the vast number of instant trades closing.

Conversely, if you do implement an intelligent network on the ground in emerging FX hubs (Seoul, Moscow and Sao Paulobeing current favourites) you shouldfind yourself with a huge advantage over competitors that have overlooked the importance of this localpresence.

Furthermore, with the right co-location facilities, (data centres have become the eavesdropping tool of the 21^st Century, i.e. having data centre connectivity so close to a local exchange is the equivalent to having a team of specialists in the region), you can receive critical information about trades ahead of everyone else.

Put simply, the knowledge you need to reduce slippage is unlocked through ultra-low latency networking.

Data Transactions Unleashed

Sadly, navigating the marketplace to implement the above connectivity can be troublesome, confusing, expensive (if mistakes are made) and time consuming. The best approach to eradicating potential issues and ensuring you receive the right solution is to illicit the help of a sector specialist that does not favour any carrier, partner, solution provider or its own sales.

Searching out a vendor agnostic, carrier neutral specialist will not only deliver the more suitable network for your objectives, but it will also allow you to consolidate existing solutions, legacy equipment and customer service contracts into a single cost effective hub matching your specific aims, and therefore allow you to focus on your trading strategy, not your IT.

Whatever the connectivity at the heart of your trades – dark fibre, intelligent IP networks, Ethernet or if you desire the very best low-latency option on the market, microwave technology (a highly customisable option that delivers latency ~40% lower than other means) – you can be sure that with a trading telecommunications specialist steering your IT, you will surpass the competition, and most importantly, stay ahead to lead the race.

So, stop risking your profitability, eliminate the belief that slippage is an acceptable cost of international tradingand take your company’s destiny into its own hands. After all, as they say knowledge is power. Nowhere is this truer than in the trading community. The only step remaining is making the decision to begin.

Source: Custom Connect UK

The post FX Traders: Stop the Slippage or Risk Slipping Up appeared first on International Finance.