Foreign exchange platform puts the brakes on high-frequency traders

EBS has changed its rules to discourage algobots.

EBS, a major interbank trading platform in in the foreign exchange market, is considering imposing a major change in the way it runs its market in order to discourage high-frequency trading from taking place.

EBS currently runs on the principle of "first in, first out" trading, where trades are dealt with in the exact order they are made. That is the way most people expect the market to work – but it also gives an advantage to those who can get their trades in quickest. That leads to the arms race that high-frequency trading has seen in the last few years, where traders pay to place their servers close to the exchange, to whittle off those last few microseconds.

Instead of this model, EBS is considering bundling together incoming trades and dealing with them in a random order. That way, every trade that came in in (for example) the tenth of a second between 12:00:00.0 and 12:00:00.1 would be grouped together and dealt in a random order, removing the advantage that the trader who got in at 12:00:00.01 would normally have.

Speaking to the FT, the chief executive of EBS explained why the company has made the decision:

The first twenty years of algorithmic trading have added great transparency and led to the compression of spreads – all great things. But there is a line beyond which marginal speed and smaller trade sizes add no value and actually harm the markets. At some point we, the public markets across asset classes, crossed that line.

The ‘first in, first out’ model sounds fair and plausible, but in modern public markets it implies ‘winner takes all’.

The classic example of how high(er)-frequency trading can have positive effects comes from the fact that the desire to shave seconds off the response time to financial information is the reason why the undersea cables linking London to New York are so high quality. Without that motivation to profit, the cables might not have been laid for decades after, and certainly wouldn't be as fast as they are now. (In fact, the USD/GBP exchange rate is still known as "cable" now, after the first transatlantic cable laid in 1858).

But as the speed of trades has increased ever higher, the side-benefits are shrinking. The difference in liquidity between a market where a tenth of a second and a thousandth of a second matters is minuscule; even if spreads might be a tiny bit tighter than they otherwise would be, no normal trader is helped by that "improvement".

So EBS's speed limit is a welcome step. By dealing with trades in a semi-random order, it removes the incentive to spend millions on shaving off the smallest fractions of time. Ironically, the companies which will benefit most in the short term are the high-frequency traders themselves, who already have the technology to trade speedily, and now don't need to worry about investing more on ever-diminishing returns. But eventually, more and more traders will match that capability, until the market becomes a level playing field again.

The other reason why traders – even high-speed ones – ought to thank EBS is that if the exchanges get HFT under control, then there's one less reason for governments to step in. Discouraging high-frequency trades is one of the strongest reasons for introducing a financial transaction tax. That hits everyone, not just the speedy traders.

A new data-centre in Manhattan. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
Show Hide image

Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.